Cisco Aktie

Great. Well, thank you, everybody, for being here. Welcome to the Cisco Fireside Chat at the Goldman Sachs Communacopia and Technology Conference. It's my privilege to welcome Cisco's CFO, Mark Patterson, alongside Cisco's President and Chief Product Officer, Jeetu Patel. My name is Mike Ng, and I cover Cisco and Comtech here at the firm. We have about 35 minutes for today's session. So first and foremost, Mark, Jeetu, thank you so much for being here today. It's an absolute privilege to have you on stage with us.

Thanks for having us. Yes.

Wonderful. Jeetu, I'll start with you. In the most recent earnings call, I think you described this as the beginning of a multiyear networking super cycle. So talk a little bit about some of the demand signals, the customer deployment milestones, that give you the confidence that this AI-driven network demand represents a multiyear durable ramp? And also elaborate a little bit about how Cisco is positioned not just for the networking piece of the super cycle, but also the growing security needs that you've been investing and planning for.

Yes. So it's a great question. And so if you just take a step back on what's happening right now, we are -- I think it's nondebatable at this point that this is one of the largest secular shifts that we have seen in a long, long time, if not ever.

And if you think about -- there was a very interesting data point that came out in -- with a study from OpenRouter, which was in February, the consumption of tokens by agents actually exceeded the consumption of tokens by humans. And since then, agents' consumption of tokens has gone up 14x. And now agents consume about 60% of the total inference capacity or the total token volume that's out there. And so that's a pretty meaningful shift.

And the second thing that you're seeing is the global compute capacity in the world, 60% of that is being consumed by inferencing rather than training. Why is that significant? Because we are no longer just in the kind of experimentation phase of building a new model, hoping that the volume is going to come. It's actually the models that have been built and people are using them, and they're using them at a pretty hefty rate. And if you think about the fact that there's probably only like sub-2% of the humans in the world that are probably using agents in any kind of power user capacity, right? And so this is the first time that you've seen in the secular shift that you don't need to have 70% of the humans using it in a power user capacity for there to be massive kind of supply shortage on -- at a macro level on the infrastructure that's needed.

So I actually don't see an end in sight as far as the demand signal because we're just getting warmed up with agents. The agents have not even gone to like 2% of the enterprise yet on going out and automating the business processes. Consumers are just starting to get warmed up with agents. And so this is going to continue for a while from that perspective. So if you assume that the demand signal -- sorry, if you assume that the demand signal continues, this way, which every piece of evidence shows that it does. Then the question is, what are the other tailwinds that are also going to continue to persist.

Right now, most organizations need fast infrastructure that's low latency, high performance. These agents tend to be far more consumptive on network bandwidth than humans. So about 450% more network bandwidth gets consumed by an agent to conduct the same task that a human will conduct, right? And so one is you have many, many more agents. You're going to have trillions of agents. These agents are going to be working 7 by 24, and they consume more network bandwidth than ever before, 5x as much as a human does.

And on top of that, you then have a huge emphasis on machine scale defense because the attacks are going to be machine scale with agents as well. And so the post-Mythos effect is going to need to make sure that people are saying, I need to have the right level of security and observability for agents. It turns out Cisco is in the center of all of these macro trends, whether it be the data platform, whether it be the observability platform, whether it be the security platform and then the entirety of the networking super cycle for hyperscalers, for neoclouds, for sovereign clouds, for service providers and for the enterprise. So I feel like this is a very durable trend for a long time to come.

Great. And just on that, I mean, Cisco was among the first to highlight how agentic AI traffic was going to impact the network. And I remember that chart very clearly where the human traffic was very spiky. Agentic traffic was high and sustained.

And physical AI is not too far now.

And physical AI is not too far now. But I was wondering if you could bring that back to the Cisco business, right, and talk a little bit about how this impacts the portfolio, the Cisco core business growth relative to what we may have seen in historical networking cycles.

See in the past, what we used to have, like we missed the cloud wave at Cisco, right? That's pretty well known. And any of these major shifts that have happened, there was a favorable architecture for Cisco and an unfavorable architecture for Cisco. So in the cloud wave, the favorable architecture was on-prem, the unfavorable architecture was hyperscalers, right? And we missed that wave.

Right now, there's 3 variations of architecture that will persist. There's going to be hyperscalers. There's going to be actually some kind of a minor variation of hyperscalers, which is neoclouds and sovereign clouds. There will be the enterprise for on-prem data centers, and then there's going to be the edge. It turns out that regardless of the variant that the market chooses, Cisco has a tailwind, right? If you go into the hyperscalers, we have a tailwind because we've actually grown our business on the hyperscaler side in 2 years from almost 0 paper taken on AI orders to $9.3 billion in the last quarter -- in the last year, in the last fiscal year.

You will see the same kind of tailwind happen within the enterprise as people are going to want more control, as models go more open source, they might want to have open weights and open source models be on-prem for them. And then what you're also seeing is there's going to be this whole new category of computing, the deskside computing, where you might have a Mac mini or an AMD or something of that sort on your deskside that is dedicated for agents to run. Those agents are going to need much more bandwidth even in the campus and branch.

So our campus and branch business for networking, which historically was pegged at like growing at the rate of GDP, 3%, 4% has now been growing at like 20% for several quarters. And the reason for that is because you're actually starting to see that we have, one, a huge LDOS cycle, which is the last day of support and people need to make sure that they refresh their infrastructure because they need lower latency, high performance. The second thing is they can't afford to keep dated infrastructure in their facilities because of the fact that you need to ensure that the Mythos effect doesn't actually create exposure to the business. And third is agents are creating so much more traffic that you have to have a whole different level of traffic pattern accommodation than what you've had in the past. So what you see is not just in the hyperscaler business, but also in the core business, you're starting to see a fair amount of tailwinds.

Great. Mark, if we could bring you into the conversation here, the fiscal '27 revenue guidance at the midpoint implies 15% total revenue growth. And even if you take out the AI tailwinds, the underlying is still up double digits. So could you talk a little bit about some of the enterprise or service provider dynamics that are driving this excluding AI acceleration? How durable is this baseline growth? And where do you see near-term upside optionality if there is any?

Yes. It's what we get asked a lot in terms of how durable is it, right? Or is this just kind of a cyclical thing? And maybe just to reiterate a couple of points that Jeetu made. I think the 3 big things that we're seeing is everything that Jeetu talked about in terms of AI applications, whether it's the models themselves or it's agentic AI really being built out in the enterprise or just the preparedness for that and the bandwidth, the latency requirements, et cetera, that are being put on the network. That's obviously, I think, the first thing that I'd highlight.

The second thing, I think, is just this whole notion of security and networking coming together and the fact that Cisco is very unique that we're both a security player and a networking player. It's -- you're seeing it play out with our Smart Switches and running Hypershield alongside it. You've got the Live Protect capabilities to be able to patch and protect from vulnerabilities as soon as those are known until you can actually do the patching and the upgrades.

And then I think just the overall need for modernization and this Mythos effect that is being turned that way anyway. But basically, the frontier models and the way that they're being able to provide the capabilities to really identify and exploit vulnerabilities at machine scale. And so the notion of sweating an asset another year is a very dangerous notion, if you will, where in the past, companies, I think, thought of this as sort of a nice to have and really scrutinize the ROI. It's now becoming a security imperative. And you're seeing boards and CEOs say, I want to know everything that's in my environment. I want to understand the risks and what's our path to actually upgrading that infrastructure too.

So -- and you're also seeing a huge opportunity from just the need to refresh and modernize infrastructure. So what's coming end of life, end of support for us, just in the next few years, we've identified over $100 billion worth of opportunity just for Cisco upgrade and refresh. And by the way, we're going after our competitors' end-of-life end of support as well, and you're starting to see some of that be reflected in some of the market share reports here as of late, showing that not only are we holding share, but we're actually taking back share in most, if not all of the networking categories for us.

So I think in terms of durability, as you look at each one of those sort of 3 big areas that I outlined, those have all been tailwinds for us, if you go back a few quarters or even another fiscal year or so. but they're all more pronounced today than they were before, and they're all very early stage in terms of where they're going to be headed over the next few quarters and years. So I think the fact is this is going to be very durable. It's a multibillion-dollar opportunity for us in many facets. And it's kind of this refresh opportunity is creating a bit of a demand floor, if you will, as you look out over the next couple of years. And you're seeing it play out. I mean networking has now been double-digit growth for 8 quarters in a row. It grew 40% actually in terms of orders overall for the company this last quarter. So we feel pretty good.

Right. That makes perfect sense. No enterprise wants to be caught running devices that are end of support just given the emerging threat landscape.

Especially not today. As Jeetu always reminds us, these are the worst models that we'll ever see. So 90 days from now, the sophistication is going to be incrementally better, exponentially better.

Mark, just on gross margins, you have fiscal first quarter '27 gross margin guidance of 65% to 66%. How much of this gross margin guidance is driven by potentially just lower-margin hardware scaling into the revenue mix or commodity cost inflation, memory and things like that. As we look throughout the balance of fiscal '27, how should we think about the trajectory of margins?

Yes. I'd say if you look at the last quarter or 2, we've actually been able to manage the memory price increases pretty well and been able to pass the cost on to our customers and largely in part because of the demand tailwinds that we talked about.

I think that as you look at gross margins overall, there's a couple of things happening here. One is bottom line, as Jeetu outlined, this networking super cycle, if you will, we're leaning into these opportunities, and we're shipping a lot of hardware, whether it's the predominantly hardware-driven hyperscale space or this significant uptick that we've seen on the enterprise side, while you've got hardware that gets recognized day 1 in terms of revenue, the software that gets attached to it is a subscription and that gets recognized ratably as well as the services that ultimately get put into place also ratable. So there's a bit of a timing difference on that side.

But I think what we said was there's sort of a slight headwind to the numbers in terms of gross margin as we go through FY '27. We've looked at the analyst estimates that have come in and feel comfortable with kind of where they're sort of stepping it slightly down as we move through FY '27. But I think the biggest thing to look at, frankly, is operating margins. So while gross margin, there was a headwind. And if you take Q4, for example, gross margin was up about 2 points relative to the year before. But OpEx was actually down almost 4 points in terms of the percentage of revenue and operating margin then was at a record level for the company, up almost 2 points on a year-over-year basis. So that operating margin, we actually did guide, which is kind of unusual because we wanted people to understand that, look, we are going to be dropping money to the bottom line at a faster pace and at a more efficient pace than we have ever before at Cisco.

Great. Makes perfect sense. Jeetu, you talked about the $9.3 billion of hyperscale AI orders last fiscal year. That does not even include the enterprise and rest of cloud orders that are for AI. Could you talk a little bit about how you expect Cisco's overall AI revenue mix to evolve? How are you positioning your product portfolio within Silicon One, optics, Smart Switches to capture demand across both ends of the hyperscale AI and then the enterprise and rest of cloud orders.

Yes. So just for those that haven't been following it closely, 2 years ago, we had said, hey, we need to do $1 billion in orders taken and put a stake in the ground for AI orders. We ended up the year at $2.3 billion. So we said, seems like it makes sense to double it. So we doubled that the following year and said, why don't we do $5 billion. We ended up at $9.3 billion. And we literally, in Q4, did $4 billion of orders, right? And so there's clearly momentum there.

Before we do that, let me take a step back on like what is the structural shift that happened in Cisco because Cisco has been around for 40 years, 41 years. And when you start thinking about one of the biggest challenges that we had is we used to operate like a holding company. We had 250 acquisitions. We had a bunch of GMs running their own businesses. Those businesses actually, each one of them was managed like its own fiefdom. And before you knew it, like it was very hard for customers to tell how these things all kind of came together.

What we've done over the course of the past few years is we have actually become a vertically integrated platform that is a co-designed full stack. We make our own silicon without which we would not have a hyperscaler business because they want choice and diversity from the others in the market. We make our own photonics. We have our own systems business with systems hardware.

We have our own system software. We have our own platform for security. We have a platform for observability. We have a platform for data. We make our own models in some cases. for networking and time series and security. We have our own applications. We have our own agents. And we have 1 unified management plane for all of this. So regardless of what you're managing with us, whether it be Webex or Splunk or Nexus switches or Catalyst or Meraki, what have you, it's all managed in 1 management plane, control plane, right?

This is a very different Cisco than what it used to be. And that transformation would not have happened without AI, not just from a demand perspective, but also because we now have 32,000 of our engineers using AI to build products on an ongoing basis. And the speed and velocity with which we're building has really kind of sped up. We used to get these kind of estimates that to go out and create a unified platform would be 7 to 10 years. In fact, Mark was in the first meeting when we first -- when I took over all product where they actually said that to me.

Within 9 months, we were able to go out and get that built. We now have like -- by the end of this year, we'll have half a dozen products that are going to be 100% written with AI. By the end of next year, we'll be like 70% of our portfolio will be 100% written with AI, no human lines of code. So there's a level of momentum that just is there in the business where if you have scale and you can inject speed, that's the superpower that's just very hard to replicate.

And we have scale and speed, not just in tier of the stack, we have scale and speed across the entirety of the stack from silicon and the physics to the semantics, right? And so that's a hard thing to go out and just say, let's go replicate that.

And as we think about our overall business, we grew our orders 35% for the overall business for the past 2 quarters. But ex hyperscalers in Q4, we grew at 25%, which means that we've got these inherent tailwinds. And as Mark said, there's also -- there's not only durability of demand, there's also a floor because you need people to upgrade your infrastructure. You need people to go out and make sure that you prevent against Mythos, and you need to make sure that your agents are associated with the right level of infra. And so all of those things become massive tailwinds.

And then we've got the security and observability where they are kind of fusing together as markets as well. So it's much harder to tell today whether an agent was influenced because of an external prompt injection attack or an agent just decided that it was the right thing to do, to go out and escape containment from OpenAI's container and go attack Hugging Face and steal the weight there because it was just following orders to say, go out and make sure that you pass the e-mail. So the fact that we have both security and observability and we can fuse them together and fuse them in the fabric of the network creates a very asymmetric structural advantage for us that is -- it's just hard to replicate.

All of these things start to compound on top of each other. And that, along with the fact that we've got scale of the number of customers, over 960,000 customers. When we build our own silicon, one of the things that you need to have is scale so that you can amortize the cost of silicon across multiple different volume segments. And now by 2029, we will be completely independent of merchant silicon providers because we have made our own silicon.

And so -- and these are hard businesses to be in. Like being in the silicon business is a 5-year planning cycle. Being in the agent business is a 3-year planning cycle. Being in the hardware business is a 24- to 30-month planning cycle. Being in the software business is a 12- to 18-month planning cycle. We've actually been able to perfect all of those and have them work harmoniously together, which is why you think about a co-design full stack. And that, I think, is what creates the level of excitement, both within Cisco, within our customers and partners. And you can see a spring in the step in both our customers and partners as well as our employee base 90,000 employees ship and operate at the speed of a start-up while still maintaining the scale that we've maintained.

Yes, I was just going to add, I think to Jeetu's credit, he won't brag on himself. But one of the key things, too, in terms of -- you used to have all these GMs, as Jeetu described, and they were all fighting for money. And they all wanted their business to be successful, but maybe not somebody else's business. And so when you really think about secure networking, for example, you got to bring multiple businesses together. And one of the very first meetings that Jeetu had me as a part of everybody is now fighting to have how do I get security built into my solution. And you don't have disparate business units asking for money. You're now looking at it holistically underneath Jeetu that says, okay, we have massive opportunities in silicon and optics and AI and how do we actually fund what really matters. And so that's been a big help, too.

Just on the hyperscale AI orders, historically, you guys have talked about 60% Silicon One-based systems, 40% optics. Could you just talk a little bit about which areas of the AI stack Cisco has the most exposure to today? And does that change over time? I mean, I've certainly seen the success that you guys have had at scale across just as an example.

Yes. So there's basically from an architecture perspective for those that might not be kind of familiar, the way that this all started was a single GPU would be able to load a model, and you would train the model on 1 single GPU. Then the models got big enough because you had many, many more parameters. And so you said, "Oh, I need to make sure that I have a model with -- where 8 GPUs can act as 1 coherent cluster. And so you created a server with 8 GPUs, and they acted like 1 GPU where you had memory that was coherent. Then they said, well, we need to make sure that we go rack scale. And so now you have NVL72 kind of racks where you've got that. That was called the scale-up networking side.

But then these racks weren't big enough. And so what people started doing is row-level scaling, which is that you have rows of rack that needed to be tied together within a data center. And that's what was called scale-out networking. And now what you have is the rows themselves aren't big enough within a data center because you can't pull enough power to a single data center. So what's happening is rather than pulling power to where you want the data center, you're going to where the power is available. And so these data centers are starting to get to be hundreds of kilometers apart, but they need to operate like 1 logical unit. And when you do that, what it requires is a whole different set of architectures, a whole different set of chip design because you might want to have things like deep buffering. So if you do have some packet loss, you don't need to restart the training run.

So what we have is we operate right now in both scale-out systems as well as scale across systems, which are go across data centers. The scale-out systems, we now have our latest chip, G300, which has close to 0.25 trillion transistors on a 100-millimeter package substrate. And then we have scale-across systems, which is the P-Series chips. So what we have is not only the chips, but we also provide these hyperscalers with full systems in place, so that they can -- they don't have to worry about support and all of those things. And so we provide them the full system.

And then with enterprises and neocloud and sovereign cloud, they also want to have just full secure AI factories, which also have security and observability and data and log management and all of that with Splunk. So that Secure AI Factory, that's a partnership with NVIDIA, which we just expanded with having Supermicro in there, we are now able to have not just a server, but server with networking and security and observability and data platform, all in a single factory that can then be tied to what you -- and the beauty about this is we always struggle with the compute business because it was lower-margin businesses. But because of the partnership with Supermicro, you can now do rack scale compute and actually have a net margin treatment for us. So that actually doesn't have a headwind on margin, but it does provide you with tremendous amount of drag potential for all the other technologies that you have. And you've got this full stack where we can go to an edge device, we can go to an GPU server, or we can go to an NVL72 class rack, all built out with Cisco technology all throughout with partner ecosystems.

Great. On security, maybe 1 for Mark and then 1 for Jeetu. I guess, Mark, you guided to a recovery in security, observability and services revenue for fiscal '27. Could you just walk through the primary drivers of that improvement? Generally, how should investors think about the Cisco security business in fiscal '27? And then Jeetu, maybe you can expand on whether this is cross-sell, the refresh products, what's happening to the legacy security portfolio, what's happening with Splunk?

Yes. So I guess at the highest level, I'd just say relative to security and services, as you mentioned, I think we're turning the corner on both. If you look at the guide that we gave for FY '27, it's for kind of high single-digit growth in security. We grew low single digits for the full year of FY '26.

As you look at security, Splunk begins to lap this sort of accounting issue that we had, not issue, but transition, if you will, from moving from on-prem to cloud. And that really starts to lap. And so you're going to see positive growth from Splunk and improving through the year. If you look at our core organic security profile, if you look at the new products, we actually signed up 1,500 new customers just in Q4 alone for those new products that we've outlined. On the refresh products, firewall now has grown in excess of 30% 2 quarters in a row. So I feel real good about sort of moving past. And I think you'll see that for the full year being high single digits, but I think you'll start to see it accelerate to double-digit growth as we move through FY '27.

And then on the services side, similar story what I was saying earlier. I think we've seen massive hardware growth. You're going to start to see those services attach, the ratable revenue start to come through. So again, we said you'll start to see services positive and moving to kind of mid-single-digit growth by the end of the year.

On the security side for us, I mean, the opportunity is massive because, firstly, we talk about this thing called a naked network. You don't want to sell the naked network. You also -- you always want to make sure that security is tied to the network because you there's such a huge need right now of making sure that if the attacks are going to be machine scale, then the defenses have to be machine scale. And you have to assume in security that the adversary has already infiltrated your environment. And what you're trying to do is prevent lateral movement. Where does lateral movement happen on the network? Who has the most amount of telemetry about the network, Cisco does. If you tie that to the security side, we have such an enormous advantage because our security competitors don't happen to have a network stack and our networking competitors don't happen to have a security stack.

We happen to have security fused into the fabric of the network, where we've actually taken the firewall and the switch and fused it into a single device. on a top of rack switch, that's what we call the Smart Switch. We have a DPU and an NPU on the same device. So the latency goes down. The packet inspection happens at the rate -- at line rate with packet forwarding. And so it's a much, much faster kind of solution. And we have taken security and sprinkled it all throughout the fabric of the networks. If you happen to want to have enforcement for security in a top-of-rack switch, you can do that. You happen to want to have it on a server, you can do that. You want to happen as an agent overlooking what's happening within your kernel and what processes are terminating on the host, you can now do that. We have basically taken security and fused it in the fabric of the network.

So then the question is, okay, so what's the next thing? Well, first is our architecture is going to change yet once again because all of the agents are going to need to get secured. Right now, so far, we've only been able to secure humans. When you think about agents getting secured, that same Zero Trust principle that you use for humans of least privileged access, you're going to need to now apply to agents. Agents are going to need to make sure that they're constantly being monitored. And when they start to show behavioral drift where they start saying, "Oh, I'm starting to see an agent do something that's different from what I wanted to do, you have to be able to intercept it in run time. All of those capabilities we now have within our foundation stack. right? And it's completely tied into the network.

So that is what the key advantage is we've got security and networking fused together, observability fused together. We can not only measure how resilient the infrastructure is, we can also measure the cost of tokens. How consumptive is that agent for token usage? Is the agent using too many tokens? Do you want to quarantine the agent because the tokenomics are not favorable to what you might want to do? Is it going to blow your budget up? All of those pieces now are part of that stack, and that's what we bring to the market.

Great. In the last couple of minutes, I just have a closing question for both of you. I guess, Mark, first, could you talk a little bit about the capital allocation strategy? Like last year -- fiscal year, you returned nearly all your free cash flow to shareholders. How is the management team balancing the shareholder return strategy, investment in the core business, M&A, right? Is that critical at this juncture?

Yes, really unchanged for us. First and foremost, is to support the growth of the business, be it organic or inorganic. Second is really to protect and grow the dividend. You've seen us do that for years. And then thirdly is just to offset dilution and with our buyback program as well as just return excess cash. And as you mentioned, almost 100% basically of free cash flow we return.

Great. To close out, Jeetu, as you look out to Cisco's multiyear road map, what's the overarching vision for the company over the next 1 to 2 years? What technology or market opportunities are you most excited about? And Mark, if you have something to add as well?

Well, look, I think we are right now at a perfect time with a massive market that we can address bit by bit. We've actually got the most comprehensive stack of anyone. We've got a great product set. We've got a great team. We've got a great brand that's trusted, and we've got great distribution. So timing, market team, product, brand distribution, we've got all 6. We've got them in spades. So that's great.

If you think about where you expect us to invest our capital so that we can continue to keep growing, you should expect us to make sure that we are focusing on all 5 kind of customer segments, hyperscalers, neoclouds, sovereign cloud, service providers, enterprise. You should expect us to focus on networking, security, observability and the data platform. And then on the -- if you think about our stack, where should we be having continued investment that we are actually pouring in is silicon is very strategic for us because everything kind of is at the foundation of silicon. And so we will continue to make sure -- you should expect us to make sure that -- I think it would not be a crazy idea to think that we are going to actually participate in different kind of use cases of silicon and we keep expanding over there. It's not crazy to think that we will actually keep doing the same thing on the photonics side.

And then as you keep moving up the stack, the goal is to make sure that we are fully codesigned in the way that we do it. And so every single thing that we do at every layer of the stack should be intentionally done with what it does to create a compounding effect for every other layer of the stack. And that's what creates this -- the goal is reduce the marginal cost of ingestion of Cisco technology, continue to keep compounding the value so that every single thing that you buy from us should add value to what you already have from us and have an open ecosystem. We don't want to be closed. We want to stay open. We will even partner with our biggest competitors as we move forward. And that actually gives us the right level of customer sentiment where they want to trust us and continue to keep partnering with us.

Quick comment because I know we're at time. I just started my 27th year with Cisco. I would say I don't remember a time when we've had as much opportunity ahead than we do today, and I'm probably more optimistic about our ability to actually capture those opportunities than I have been today. So thank you for having us, Mike.

Jeetu, Mark, thank you so much for participating in the conference. It's been a privilege to have you on stage.

Thank you.

Welcome to Cisco's Fourth Quarter and Fiscal Year 2026 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.

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 our 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 and all comparisons will be made on a year-over-year basis unless stated otherwise. Please note that our discussion today will include forward-looking statements, including our guidance for the first quarter and fiscal year 2027. These statements are subject to risks and uncertainties detailed in our SEC filings particularly our most recent 10-K 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 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 delivered a very strong close to fiscal 2026, making it a record year for Cisco with revenue exceeding $63 billion and growing 12% year-over-year. In fact, in FY '26, we delivered the highest revenue, operating margin and earnings per employee in 30 years, demonstrating excellent execution from our teams and the increasingly critical role our technology has in the AI era. In FY '27, we expect all these metrics to continue to improve, as indicated in our guidance, demonstrating outstanding productivity and earnings power.

We believe the accelerating adoption of agentic AI is fueling a networking super cycle. As customers look to manage increasing traffic and costs, they are investing in Cisco's Networking stack, for inferencing across cloud, on-premise and edge environments. At the same time, the rise of agentic AI is expanding the threat landscape, driving demand for our Security and Observability solutions to help monitor agent behavior and mitigate evolving threats. This presents a unique opportunity for Cisco, and we believe we're only at the beginning of this super cycle.

Turning to Q4. We delivered record revenue of $17.3 billion in the quarter, up an impressive 18% year-over-year with Product revenue up 24% year-over-year. Our record top line performance, combined with operating efficiencies, resulted in non-GAAP EPS growth of 23% in Q4 and 14% for the full year. This demonstrates strong operating leverage with the bottom line growing faster than the top line for both the quarter and the full year. The profitable growth of our business continues to produce strong cash flows supporting our commitment to deliver consistent capital returns.

In Q4, we returned $3.2 billion in capital to our shareholders through share repurchases and dividends, bringing the total return in fiscal '26 to $12.7 billion in value or 99% of free cash flow. Our results are a testament to the trust we built with our customers and our commitment to deliver the outcomes needed as they navigate this period of accelerating technological change.

Now some color on demand. We saw strong momentum and broad-based demand for our technology globally, with total Product orders up 35% year-over-year in Q4 and hyperscale orders up triple digits. Excluding hyperscale, product orders were up 25%. Enterprise product order growth accelerated to 21% year-over-year in Q4 with double-digit growth in every product category and geography. Public sector order growth also accelerated to 30% year-over-year, with continued momentum in EMEA and APJC and accelerated growth in the Americas driven by U.S. Federal. Product orders from service provider and cloud customers grew 95% year-over-year, with 4 of the top hyperscalers each growing AI infrastructure orders in the triple digits. We also saw increasing strength in Telco in Q4 with orders growing over 30% year-over-year.

Now turning to product demand. Networking product orders grew 40% in Q4 driven by triple-digit growth in Service Provider Routing and Acacia Optics, and double-digit growth in Data Center Switching, Compute, Campus Switching, Wireless, Enterprise Routing and Industrial IoT products. Q4 marked the eighth consecutive quarter of double-digit growth for our Networking portfolio overall supporting our view that we are in a multiyear, multibillion-dollar networking super cycle. It is also worth noting that more than half of our customers purchased both Campus and Data Center Networking Solutions, demonstrating our differentiated platform approach where new technology investments compound the value of existing investments.

Moving to AI infrastructure for hyperscalers. We took $4 billion in orders in Q4, bringing the total for FY '26 to $9.3 billion, approximately 4.5x our fiscal year '25 total. The mix of these orders in both Q4 and FY '26 was approximately 60% Silicon One-based Systems and 40% Optics. Our Acacia business had another very strong quarter with over $1 billion in orders in Q4 and to date, we have shipped over 850,000 400-gig and over 75,000 800-gig Coherent Pluggable Optics. As AI workloads become increasingly distributed across clusters and facilities, we believe demand for this technology will remain strong, and I'm incredibly proud of our market leadership in this space.

We won three new design wins with hyperscalers in Q4. One of these was for our Silicon One P200 [ power ] system for scale across, bringing our total to 3 scale across design wins for the P200 since launch, each with a separate hyperscaler, and we have already received orders for these in Q4. We believe this is only the beginning of the scale-across motion. As AI models grow in complexity and size, hyperscalers need to connect or scale-across multiple data centers due to physical and power limitations in a single data center. Power efficiency, reliability and scale are critical in ensuring distributed GPUs function as if they were in the same location. Given these requirements, Cisco is well positioned with our P200 Powered Systems market-leading Optics, Open Line Systems and coming soon Multi-rail Optical Systems to provide hyperscalers the technology needed for these complex use cases.

The additional hyperscale design wins in Q4 were for a scale-out use case with our G200 Power System and one for a Managed Optical Fiber Network, which leverages our Line System Technology and enables the use of our Digital Coherent Optics directly in third-party equipment. The optical win is strategic as it positions Cisco as an alternative supplier to an incumbent competitor and has the potential to disrupt traditional delivery of managed optical fiber networks. Additionally, we have line of sight to multiple AI design wins expected over the next 6 months across our G300, G200 and P200 Silicon One chip designs as well as for Optics.

As I've said before, our success with hyperscalers can be attributed to Silicon One, the industry's most scalable and programmable architecture for a wide range of use cases and infrastructure designs. Notably, we plan to roll out Silicon One comprehensively across our high-performance Networking Systems by fiscal year '29, which gives us greater control over our supply chain and innovation pipeline. Importantly, our control of the Silicon Systems and Software will enable us to develop more performance secure networking, reinforcing our competitive differentiation and positioning us for market share gains. Overall, our Hyperscale business continues to show great momentum with AI infrastructure revenue projected to grow to $7.5 billion in fiscal year '27 supported by demand growth and market share gains.

For perspective, in FY '26, approximately 6% of our total revenue was from AI infrastructure for hyperscalers, up from less than 2% in FY '25.

In addition to the hyperscaler demand, we took over $400 million in AI infrastructure orders from neo-cloud, sovereign and enterprise customers in Q4, bringing the total for the year to over $1 billion. We had a new design win in Q4 with a major neo-cloud provider for our G200 Powered System for a scale-out use case. In Enterprise, Nexus Switch orders tagged for AI deployments were up more than 85% sequentially. As these customers look to scale AI economically, there is increasing focus on managing token consumption. Selecting the right model in the right location for each workload. We believe on-premise AI infrastructure will become an important option for enterprise customers as they look to optimize both the business value and cost of AI. Enterprises need GPU clusters on-premise and at the edge with low latency, high-bandwidth networking and built-in security, observability and automation, all of which Cisco can provide and codesign vertically integrated stack. Regardless of how or where customers choose to deploy AI, whether in the public cloud through neo or sovereign clouds on-premise or at the edge, we believe Cisco will benefit because of the unmatched depth and breadth of our portfolio and our expertise in each scenario.

As we look at overall Enterprise demand, we see customers investing in infrastructure across their environments. In Q4, overall Data Center Networking orders grew more than 35% year-over-year. Notably, a leading U.S. global bank placed an order for 1,000 Cisco Data Center Smart Switches replacing a major networking competitor and a major firewall competitor, transitioning to a secured networking architecture, which only Cisco can provide. Customers are also focused on modernizing the workplaces, and we continue to see strong demand for Campus Networking Solutions with 20% year-over-year growth in product orders in Q4. Our next-generation Switching, Routing and Wireless products continue to ramp faster than prior product launches with WiFi 7 orders representing more than 50% of total Wireless orders in Q4. We see the momentum in Campus Networking being driven by infrastructure modernization to both scale AI initiatives and to strengthen defenses against a rapidly evolving cyber landscape.

A leading frontier AI company has chosen Cisco's Campus Networking Solution, including WiFi 7 access points, Smart Switches and end-to-end segmentation to enable innovation at speed and provide the security for that innovation as they rapidly scale to new locations. Orders for our Industrial IoT portfolio have also now grown in double digits for 9 consecutive quarters, and continued to accelerate in Q4, driven by deployments in manufacturing and utilities as well as in data center facilities where ruggedized networking equipment is needed to withstand extreme operating conditions.

Now shifting to Security. Our entire security portfolio including Splunk saw double-digit order growth in Q4. In our core Security portfolio, over 1,500 customers purchased our new products, including Secure Access, XDR, Hypershield and AI Defense in Q4, this brings the total number of net new customers to over 6,400 since launch. Orders for Firewalls grew over 30% in Q4. When it comes to securing AI, customers increasingly want a unified approach across users, applications and agents, and we are seeing greater adoption of our AI security capabilities of AI Defense and guardrails and Secure Access. As quantum computing creates risk both today and in the future, customers will need to assess the exposure of their infrastructure to these risks. We believe Cisco is uniquely positioned to help customers assess potential exposure and implement quantum safe protection across devices, networks and data using post-quantum cryptography or PQC.

Some of our newest systems, including Cisco Secure Routers, Smart Switches, Wireless Controllers and Secure Firewall platforms are PQC-compliant making them very compelling, especially for the most highly regulated industries.

Turning to Splunk. We see good momentum as solutions are integrated into our Security offerings and contributing to several whole portfolio agreements in Q4. We also added more than 280 new logos to Splunk's customer base and secured the highest number of competitive wins in any quarter in fiscal year '26. As a result, we exceeded our target of 1,000 new logos for the year.

In our Collaboration business, we saw the best quarterly performance in 7 years with double-digit order growth in Q4 and Video Devices growing 40% year-over-year. Now I'd like to comment on our innovation pipeline.

At Cisco Live U.S. in June, we introduced Cisco Cloud Control, a single management plane and unified data layer for all Cisco products built for humans and agents. Cisco Cloud Control incorporates key innovations such as AI Canvas and Cisco IQ. Since launch, nearly 4,500 enterprises have signed up for Cisco Cloud Control and are highlighting the value they're getting from AI Canvas and other insights. For example, a network engineer at a major U.S. enterprise software company, spent more than 8 hours trying to troubleshoot dropped video calls before prompting AI Canvas, which pinpointed within minutes the specific access point, identified the root cause and laid out next steps. Customers are now prompting AI Canvas daily to surface previously unavailable insights and helped deliver huge productivity gains.

We continue to innovate in Security and recently launched Antares a family of open weight, small language models designed to help cybersecurity professionals pinpoint known vulnerabilities within a code base. Antares is part of a broader Cisco effort to define practical and trustworthy AI tools for cybersecurity professionals and help develop standards to support AI security adoption. Last month, we also introduced Resilient Infrastructure Services, powered by Cisco IQ, which now has over 8,600 customers. Resilient Infrastructure Services help customers identify vulnerabilities prioritize actions and implement continuous protection autonomously and at machine speed.

We also continue to accelerate AI advancements across our entire business, both internally for our teams and to better serve our customers. We are using generative AI and agentic systems across our customer experience organization, which is dramatically expediting quote turnaround, and case resolution times as well as driving higher renewal rates. In FY '26, 145,000 support cases were resolved entirely by AI with zero human intervention. Circuit, our on-prem proprietary AI assistant is fully embedded in how Cisco operates, supporting over 75 million prompts in Q4, Circuit runs on our Secure AI Factory infrastructure, which improves GPU utilization and automatically routes each task to the appropriate large language model, allowing us to manage token consumption.

To summarize, I'm incredibly proud of our teams and how they show up every day to ensure our customers get the very best from Cisco. We believe we are in the early stages of a networking super cycle, presenting a massive opportunity for our business, and we are committed to helping our customers modernize and secure their infrastructure to unlock the full potential and value of their AI investments.

Now I'll turn it over to Mark for more detail on the quarter and our outlook.

Thanks, Chuck. We delivered a very strong quarter, exceeding the high end of our guidance across revenue, operating margin and EPS, with solid operating cash flow. For the quarter, total revenue was a record $17.3 billion, up 18% year-over-year. Non-GAAP net income was $4.9 billion and non-GAAP earnings per share was $1.22, each a record and up 23%, demonstrating excellent operating leverage with net income and EPS growth outpacing revenue growth.

Total Product revenue was $13.5 billion, up 24% and Services revenue was $3.8 billion, flat year-over-year. Product revenue growth was led by Networking with growth accelerating to 28% year-over-year, driven by triple-digit growth in AI infrastructure, double-digit growth in Data Center Switching and continued growth in Campus Networking.

Security delivered a strong quarter, up 14%, reflecting strength in Splunk, Network Security and SASE. Collaboration was up 12% with solid growth in WEBEX, Devices and Contact Center.

Turning to our recurring metrics. Total RPO was $46.7 billion, up 7%, with Product RPO up 9%. Total ARR ended the quarter at $32.1 billion, an increase of 3% with product ARR growth of 5%. Total subscription revenue represented 48% of Cisco's total revenue. Total software revenue was $6.2 billion, up 11%. Q4 product orders were up 35% year-over-year with broad-based strength across geographies, technologies and customer markets. All geographies saw double-digit growth with Americas up 44%, EMEA, up 25% and APJC up 19%.

In terms of customer markets, the growth was led by service provider and cloud with 95% growth. We also saw strength in public sector and enterprise, which were up 30% and 21%, respectively. Total non-GAAP gross margin came in at 66.3% down 210 basis points year-over-year, but up 30 basis points quarter-over-quarter. Non-GAAP product gross margin was 64.8% down 270 basis points, primarily driven by higher hardware mix and memory costs, partially offset by productivity improvements and price increases.

Non-GAAP services gross margin was 71.6%, up 80 basis points. We continue our focus on providing consistent profitability through financial discipline with non-GAAP operating margin at 35.9%, reflecting strong execution and operational efficiency. Our non-GAAP tax rate was 18.8% for the quarter.

Shifting to the balance sheet. We ended Q4 with total cash, cash equivalents and investments of $15.9 billion. Operating cash flow was $5.4 billion, up 27%, driven by strong revenue growth and operating leverage. From a capital allocation perspective, we returned $3.2 billion to our shareholders during the quarter, comprised of $1.7 billion for our quarterly cash dividend, and $1.5 billion of share repurchases. There is $8.1 billion remaining under our share repurchase program.

Turning to the full fiscal year. Revenue was a record $63.3 billion, up 12%. We achieved this while also increasing our non-GAAP operating margin by 40 basis points to 34.8% demonstrating continuing operating leverage. On the bottom line, non-GAAP net income was $17.2 billion, up 13% and non-GAAP earnings per share was $4.33, up 14%, both a record and growing faster than our double-digit top line revenue growth rate. We returned $12.7 billion in capital to our shareholders through cash dividends and share repurchases. This was comprised of $6.6 billion in quarterly cash dividends and $6.1 billion of share repurchases. We increased our dividend for the 15th consecutive year in FY '26, reinforcing our confidence in the strength and stability of our ongoing cash flows.

In summary, we achieved record-breaking performance for both the quarter and the fiscal year with top and bottom line results that exceeded our expectations. This success is a direct result of our accelerated pace of innovation across our portfolio, our strong order momentum and disciplined expense management. 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 Q4, we closed the acquisitions of Galileo Technologies, Inc. and Astrix Securities Limited to further expand our Observability and Security offerings. All these investments continue to be underpinned by our commitment to disciplined spend management. It is this powerful combination that continues to fuel strong cash flow and our ability to return significant value to our shareholders. Looking ahead, you can expect us to continue our focus on driving durable growth with financial discipline, driving operating leverage and continued capital returns.

Turning to guidance. For fiscal Q1, 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 35.5% to 36.5%. Non-GAAP earnings per share is expected to range from $1.32 to $1.34. We are assuming a non-GAAP effective tax rate of approximately 18.5%.

Our guidance for fiscal year '27 is as follows. We expect revenue to be in the range of $72.2 billion to $73.4 billion. Non-GAAP earnings per share is expected to range from $5.05 to $5.11. Sami, let's now move into the Q&A.

Thank you, Mark. I want to remind analysts to ask a single question and a single follow-up. Operator, can we move to the first analyst in the queue?

Our first caller is Amit Daryanani with Evercore ISI.

Congrats on some really impressive numbers here. I guess maybe my question to start it would be, Chuck, your fiscal '27 guide at the midpoint is implying 15% revenue growth. Even if I take the AI revenues out of the equation, it's implying double-digit 10% growth ex-AI versus your long-term model that's at 4% to 6%. Can you just touch on what's driving the ex-AI growth? And how do you think about the durability of this growth given your comments around the start of a networking super cycle that would be really helpful to understand because I think everyone will worry that is this the peak of the cycle?

And then as my follow-up, you're guiding for the $7.5 billion AI revenues in fiscal '27. I'm hoping you can double-click on how are you thinking about the scale across opportunity across Silicon One and Optics? Especially as you get ready to launch your own Multi-rail Hyper-rail solution next year.

Thanks, Amit. Let me just write this down real quick. So first of all, I'm incredibly proud of the team and what we've accomplished. It's been several years in the making, and we'll talk about that throughout the Q&A today.

But I think this super cycle is really -- it's enabled because we uniquely have our Systems, our Silicon, our Optics, Security, Observability and really being able to integrate that into a stack for our customers. If you look at the overarching opportunity that we see, if you just go across what's happening today, I think it's clear what's happening in the hyperscalers with AI. We did in excess of -- we did $9.3 billion in orders last quarter. We've now giving you a revenue number of $7.5 billion. We -- that's revenue and not orders, just to be clear, in FY '27. So we got the hyperscalers moving forward. We've got the telcos that are building out. We had orders in Q4 in excess of 30%, and they're building out their infrastructure to actually be ready for technologies like the scale-across opportunity that you discussed, which we think the network traffic related to AI-based scale across versus traditional data center interconnect is roughly 14x what it might have been before. So the telcos are building to get ready for that.

You have the enterprises that we've talked about for over a year now, where they're modernizing their networks to be ready for AI. Now we have this impending Mythos effect that they're all looking forward to downstream, we have quantum that they need to prepare for. And those are all drivers of what we've been talking about relative to just an overarching campus refresh, where for the first time ever we've had. We have our Campus Networking, our both Switching, Routing as well as Wireless and everything -- all of those are going through a refresh at the same time. And that's all -- is actually accelerated by -- when we think about Mythos, we think about customers doing analysis right now on their LDOS or their last day of support footprint, products that can't be patched. I mean -- all of these things, we believe, are going to actually drive this super cycle for a while to come. So we feel very good about that.

On your second question relative to scale across. I think if you look at it, I mentioned a few minutes ago that we think the traffic that's generated from AI-based scale across, which is effectively what used to be data center interconnect is 14x what it was historically. And we're uniquely positioned because in that space, we've got our P200, which we talked about having three wins already in that space across three different hyperscalers. By the way, we started taking orders from all three of them in Q4. So that's positive. We also have our Optics, which has -- Acacia had another $1 billion quarter, as we discussed. And we actually announced our first design win in multi -- in Optical Networking, and we have the Multi-rail Systems that we're actually beginning to deploy in these platforms as well. So we think that if you look at the opportunity for scale across, it's massive, and we believe that we're very well positioned to take advantage of that as we go forward.

Ben Reitzes with Melius Research.

Nice results, Chuck and Mark. I wanted to ask about gross margins. What is your approach here in the first quarter and for the year for them to contract a little bit? Like just what are you seeing? Are you being conservative? And how did you just come up with 65% to 66%, given some of the constraints, and what's the color there?

And then I wanted to also ask just kind of another approach here to the revenue guidance for the year. What is your -- your Networking orders are 20% and plus 50% plus 40% the last couple of quarters. Obviously, that would mean revenue in Networking is going to grow slower than what we've seen in orders in your guidance. Is this a conservative approach that you have -- why wouldn't Networking revenue kind of meet the order patterns in the middle as we go throughout the year?

Mark, do you want to take the first comment or take them both actually.

Yes. So Ben, maybe just to kind of step back and give a little bit of color and unpack the the key assumptions that underpin the guide, and I'll hit on the gross margin piece and the second part of your question as well.

So I think as you look at the full year, we ended FY '26 with double-digit top line and bottom line growth, 12% and 14%. We see acceleration in both of those. So accelerating to 15% on the top line, 17% on the bottom line, again, driving that operating leverage with bottom line growth faster than the top line. With the $7.5 billion in hyperscale revenue if you kind of back that out, you get to the core business growing at about 10%, which is obviously significantly faster than Investor Day that we've done awful long ago at this point. And then underneath revenue, maybe a couple of other data points, and then I'll get to the gross margins.

If you look at Security and Observability, I would think about those going from kind of low single-digit growth in full year FY '26 to high single-digit growth in full year FY '27, and we can talk more about the shape of that maybe later in the call. But Services. I also think you're going to see improvement there as well and turning positive in FY '27 and for the full year, seeing gradual improvement as we move through the year and then for the full year kind of being in that low single-digit growth range. When you think about operating margins and gross margins, first off, as Chuck said, we are in this networking super cycle, which we're very early in the cycle, and we're shipping high volumes of hardware, which is increasing the revenue mix to hardware considerably. So you should expect a slight gross margin headwind as we move through FY '27 as we address these very high-growth opportunities. And operating margin is really a better indicator of our profitability as our guide implies operating margin of about 35% for the full year FY '27, which would be a high watermark for us as a company.

And in terms of -- I think the second part of your question was could Networking grow even faster and is there some conservatism in there? Certainly been really happy with the Networking growth and a lot of the underlying demand trends that Chuck outlined, I think though as you get into sort of Q2 through Q4, the implied growth is more like 13%. And it's really the comps. As you look at last year, the first half being in top line growth of kind of single-digit growth. And as you get into the second half being sort of mid- to high teens growth, the comps are going to get much tougher there. Also the linearity, if you just look at Q1 revenue guide versus the full year is at about 25% of the year and our 3-year average is for Q1 to be about 25%.

Mark, I want to make one comment on the operating margins. When you think about the 35%, I think it -- the thing to really understand is that it indicates the profitable scale of the strategic opportunities that we're pursuing, particularly with the hyperscalers. If you think about the the triple-digit growth that we talked about in the hyperscalers, our expenses to actually capture that growth are minimal in addition to what we spend today.

So if you think about our traditional business, you could largely say our growth rate and our expenses, they're not 1:1, but they're much closer. This business because of the magnitude of it and the growth rates, it allows us to take, even in some cases, a lower margin business from a gross margin perspective, that actually turns out to be highly profitable because we don't have to add incremental expenses to go gather that business. So these are strategic decisions we're making about business to pursue, and we feel really good about the profitability impact of those businesses.

Yes, maybe just a quick data point on that, Chuck. So I think Q4 is a great example of that. Gross margins on a year-over-year basis were down 2.1%, but OpEx was also down 3.7% as a percentage of revenue, which then allowed us to move from operating margins [indiscernible] as a percentage of revenue, from 34.3% to 35.9%. So really showing incredible scale and productivity.

Meta Marshall with Morgan Stanley.

Great. Nice to see the pickup in the Security business, 14% year-over-year, pretty meaningful improvement in growth. Just wanted to get a sense there. Is that anniversarying some of the headwinds from a business model perspective on Splunk? Is that a lot of technical debt being replaced? And then maybe a second question for you, Chuck. You spoke to enterprises are changing kind of how they're thinking about on-premise to cloud. Given the amount of conversations you're having, is this cost argument that they're making as a security data sovereignty, just how are you seeing that conversation with customers evolve?

Yes, I'll take the first part, Meta. So on Security, obviously, really pleased with the 14% revenue growth that we saw in Q4. What I think we've done is we've really turned the corner on Security, I think, and Splunk both, meaning that the trend line will be good now. We'll exit FY '26 with full year growth in overall Security in low single digits, it will be high single digits is what we expect for FY '27. But that 14% did have, and you kind of alluded to this could be the fact, they have a little bit of an anomaly in there. We saw Splunk during the quarter, and it always just depends on customer preference. And during the quarter, we had some sizable on-prem deals that also had a little bit longer duration. So that significantly helped the overall Security number in terms of revenue. We see that longer term really being likely going back to more of a 2/3 in the cloud, 1/3 on-prem. So I think overall, though, Security is probably mid- to high single digits in Q1 and improving as we go through the year.

Yes, Meta, I think one of the comments I'd make on Security and then I'll answer your enterprise question. I think we talked a lot about our belief that the organic Cisco solutions would begin to improve as we got through last year and then into this year. And what I would say is I think our comment was that they'd be approaching double-digit growth as we exited the year, and they were high single digits, so they did exactly that. We had 1,600 new customers for the new products, bringing our year to over 6,400, new customers on the new technologies that our teams have built and we saw a second quarter in a row of 30% growth in firewalls in Cisco Firewalls. So we think that will just continue to get better next year as we said on our last call.

On the question relative to the enterprise and this whole discussion of on-prem cloud, is it a cost issue security issue, a sovereignty issue? The answer is yes.

I think what you're seeing right now, it all started with this whole discussion around tokenomics, and then it's expanded quickly into open models, open weight models, foundational or frontier models. And what's -- how are enterprises going to navigate this -- the future there's a agentic security that's coming into it, there's security of my data, there's sovereignty of my data that comes into it. So what we believe is going to happen is you're going to have customers that are going to make intelligent decisions about which models they use based on use cases, and which ones are most appropriate for whatever agentic applications are running.

So for us, in particular, if they continue to use cloud-based models, that's good for us just like it has been for the last 2 years. If they move to open-weight models or models that they're running on-prem, that's great for us because it means they will invest in more enterprise private data center networking, which we've seen in the last 2 quarters. Q3 was in excess of 40%, I believe. And in Q4, it was in excess of 35%. So we've seen continued growth in investment in that space. So that's good for us. And as you see them deploy agents in this whole focus on agentic security and the network implications of running thousands and thousands of agents in your infrastructure and the performance and the latency issues the edge deployments that are going to occur, we think that regardless of the architecture that enterprise customers choose to take and how they deploy, whether it's on-prem or cloud, we think it's going to be a positive for us.

Aaron Rakers with Wells Fargo.

Congrats on the results. I wanted to try and unpack a little bit more, I guess, the implied guide in this current quarter would suggest over 20% year-over-year growth. It looks like it would imply maybe a deceleration into the subsequent quarters to hit the midpoint of your guidance. So I was wondering if you could help us bridge the $7.5 billion of revenue that you expect from AI, the linearity of what you're assuming through the course of fiscal '27?

And then as a quick follow-up, just curious on the supply side. I see the inventory continues to grow. I guess, given the dynamics we're seeing in the component availability environment, what has Cisco done in terms of just continually incrementally adding purchase obligations or expanding the supply chain ecosystem to support the demand?

Yes. Aaron, -- so I think there's a few things in there. I think in terms of just sort of the Q1 versus rest of year and the implied slowdown. I think a couple of things. I think we're being prudent on the remainder of the year. I also think that the two data points that I threw out earlier in terms of the comps getting much tougher. That's certainly something as well as the overall linearity for the year being right in line with Q1 being right about 25% of the year. It makes us feel good in total.

I think on the $7.5 billion revenue for AI hyperscale, you should sort of expect a good trend line in terms of gradual increases as we move from Q1 through Q4. And then the last piece on the components, I think the big thing is we're really leaning into our financial strength. We feel like we've got a world-class supply chain team and they've been voted as such actually for a number of years. And we really do not have any significant lead time issues that we're seeing, unlike we've heard a number of different peers talk about. We're consistently entering into strategic agreements. You've seen us make investments like we did in Nanya on the memory side. We don't have any middleman between us and TSMC. So when we are securing silicon, we're looking at the whole supply chain, whether it's wafer substrates, assembly and test and really dealing directly with TSMC. We feel we've got adequate supply to meet not only the guide for FY '27. But if demand actually strengthens and goes above that, we feel like we're in really good shape to meet that as well.

David Vogt with UBS.

Great. Chuck [indiscernible] probably going to beat a dead horse here. If I think about where your AI orders were a year ago on an LTM basis, I think you guys have done like [ $2 billion ] of AI orders. And if I just assume that half of that, that recognizes the revenue this year, it feels like you did about $3 billion of rev-rec from over $9.3 billion of orders. I know you don't give backlog numbers, but I guess what I'm trying to understand is, I understand you took the numbers from $6 billion to $7.5 billion for AI revenue. But again, that just strikes me as very, very conservative. Is there something about the timing of the order deliveries or orders stay shipped out north of 12 months? Or is it supply chain related?

And I'll give you my second question on Campus. Obviously, you've implemented a series of price increases going back aways now. Can you talk to what was the effect of price increases on the non-AI part of the business within Networking? And what are the conversations sound like from a receptivity perspective from customers where they sit in the, I guess, market today? Are they accepting the price increases? Or are they just ordering [ ahead ]? Just any qualitative commentary that you could share there would be helpful.

Yes, sir, David. So a couple of things there. I think on the AI orders, just for clarity, we did about $4 billion in revenue and $9 billion in orders for FY '26. So obviously, you're entering with some good backlog as we go into '27. But these are nonlinear orders that are massive in scale and are usually placed well ahead of time. So I think the $7.5 billion is a good prudent guide for the year.

In terms of the price increases, as you look at the impact on the financials, it was about 5 points in terms of top line revenue growth that we saw in Q4. As we look to FY '27, you're going to begin to lap those price increases that we really started to put in place in the second half there. So you have more of an impact in the first half than the second half. And overall, we're sort of planning for that kind of 4 points to 5 points of impact this year as well. I would just tell you that price increases are certainly a last resort for us. I mean we're doing everything we can to secure the right supply at the right prices and build up strategic inventory where needed and advanced purchase commitments and -- and we're also doing a lot internally.

Jeetu and the teams have got over 30 different programs that are all around the most efficient utilization of memory in our products. So that certainly helps us as well. WiFi 7 is a big example there, where the improvements that the team have done within about a 90-day period actually reduced the memory utilization in [ WiFi 7 ] by 50%. So really strong, I think, there as well.

So overall, the other thing, I guess, maybe just to keep in mind for you is the price increases that we've done have been single digit, unlike other companies that may have a majority of their products that are servers. 95% of what we sell are not servers roughly. And so rather than 2/3 of the bill of materials value being in memory, you're in kind of the 15% to 20% of the bill of materials might be memory-related for our products. The price increases that we do are specific to hardware not specific to software, for instance, and they're really driven towards those products that have a higher level of memory utilization so that we really try to zero-in on where the pain is being felt and make sure that we're only passing on what we need to there. But we're doing a good job of passing that price on. I think the customers -- while they don't like it, they understand that it's an industry issue, not a Cisco issue.

Joseph Cardoso with JPMorgan.

And maybe just one for me and somewhat of a follow-up, I guess, from some of the other ones but maybe pulling at the thread at a different angle. I just wanted to better understand the conversations you're having with enterprise customers, and the sustainability of spend here. Specifically, it seems like the spend is really broad-based across the IT stack. We're seeing it with the server vendors, we're seeing it with you on the networking side, which is also in this backdrop of this inflationary environment. And so as we take a step back and we think about kind of this -- your enterprise customers' budgets, what are they communicating with you? Are they increasing in tandem with this demand? Or at some point, are you expecting them to get stretched? Just trying to understand how that's playing out and what you're hearing from your customers?

Joseph, I think most of our enterprise customers today, they recognize that we are in the midst of probably the fastest moving technology transition that we've ever seen. And from my peers, the CEOs and these companies, there's a combination of ensuring that they're moving with enough caution that they actually get this right, but not moving too slow to where their competition actually creates a competitive differentiation that puts them at a disadvantage. And so I think that they're continuing to move and they all have a real recognition that if they were to pause that they put the companies that they run at risk. And so that's the backdrop.

Now as it relates to budgets, what I think is going on, what we're hearing from our customers is they're currently re-prioritizing within their existing budgets. But I would also say that you're beginning to see a trend where our customers are looking at AI readiness, Mythos readiness, quantum readiness in a similar vein to how they looked at cybersecurity spend over the last 3 to 4 to 5 years. It's just not optional. And we have to make sure we're ready. We have to make sure that we're secure, we're prepared. We're doing the best we can, not to have vulnerabilities exposed, and I think from that perspective, that's creating a shift of dollars from other areas in the organizations to IT to actually do that work.

And so as an example, we haven't seen a massive amount of impact from Mythos yet. But we are having a ton of conversations. We've got customers that are running Cisco IQ that are actually assessing their infrastructure, understanding what's last day of support, what can be patched, what can't be patched and we've seen the pipeline increase meaningfully as a result of Mythos which is really showing up as a network refresh, but is probably underneath viewed as a cybersecurity spend. So that's kind of what we're seeing in that space.

Karl Ackerman with BNP Paribas.

I have two. For my first one, you indicated that Campus Networking products orders grew 20% year-over-year in Q4. Are you quantifying how Cisco Cloud Control contributed to this product growth? Or is that synergy a driver going forward? And as you address that, can you comment on the durability of enterprise IT demand budgets going into fiscal '27 given your stronger-than-expected results so far in the second half of '26?

I'll -- I think they're very connected. The second question is a lot of what I just went through. But I think the Cisco Cloud Control, first of all, is getting a ton of positive feedback from our customers. I think we have 4,500 or so customers that have signed up and want to actually be part of a white glove program that we're running right now. So we're working through those. I think it goes GA in the next month or so in the U.S. and then in the next 3 to 6 months or this month, it goes GA in the U.S. And I think -- while I wouldn't say Cisco Cloud controlling to itself as good as it is, I wouldn't say that's what driving it. But I will say that Cisco Cloud Control is [indiscernible] of the platform approach that our teams have taken in our product organization, which customers have absolutely seen.

So if you think about like consolidated AI Canvas, which is part of Cisco Cloud Control. You think about the ability to manage cloud-based and on-prem networking devices from the same platform. All those things have contributed to that demand. And I think, as Mark said earlier in the call, I think what you're going to see is when the Q2 market share numbers come out, you're going to see that because of the product innovation as well as this platform approach, our sales teams are telling us very consistently that, that's what's resonating with our customers, and that's leading to this durable demand that we see in addition to what I just described relative to how the customers are thinking about their budgets.

Tal Liani with BofA Securities.

It's actually Thomas Zilberman on for Tal tonight. I wanted to ask about the Hyperscaler order trajectory that you're seeing. I think you said earlier in the call that Telco orders were up 30% this quarter, and I think that compares to 9% growth last quarter. But if I look at the combined segment growth last quarter, telcos and cloud was up 105% and this quarter it was up 95%, which means that there was some slowdown of the hyperscaler orders this quarter. The question is, is there anything notable you're seeing in terms of the demand environment? Or is it just about nonlinearity of orders? And I guess the follow-up would be, if there's any color you can give us into how you're thinking about AI orders next year?

Let me take the first part, and then Mark, you may want to talk about AI orders and how we're going to talk about it this year. I think going from 105% to 95%, I think that's probably some sort of comparison issue from a year ago would be my guess because we had the 4 big hyperscalers all grew triple digits for us, I think, during the quarter. So we did not see -- and again, at the beginning of the quarter, we said we would do over $4 billion and we saw -- we did over $4 billion, which was obviously the largest quarter of the year for us.

I think the good news is the Telco business accelerated, and I don't know what the comparisons are off the top of my head, but that might have had something to do with it. But the difference in size of these businesses quite meaningful now. So you're just not going to see a 9% to 30% move in Telco have that massive of an impact on the total number. But I actually view it very positively because I think they're both big elements of the super cycle we're talking about. When the telco recognizes the fact that the cloud providers and their network requirements for these AI workloads and particularly the scale across technology, they're getting the inbounds from these customers talking about their need for bandwidth, and that's what's leading them to spend. And so I don't think there's been any change at all in the material demand from our hyperscaler customers. Mark, do you want to talk about how we're thinking about revenue versus orders?

Sure. Thanks, Tommer. Yes. So if you look back at FY '25 and gave you an order target, if you will, for the year and then continue to update that as we move through the year. The big reason why we did that is really to just demonstrate the size of the opportunity itself as well as the criticality of our role in this space as we were really beginning to communicate this and really making our move into this space.

As we get into FY '27 we'll move to a more traditional revenue target, which we gave you of $7.5 billion. You're going to get regular updates from us on forward-looking metrics design wins, orders taken, et cetera, as we move through the year. So we'll continue to update you on that front as well. I just won't put out an annual target. But instead, we'll have an annual revenue target -- you should though expect orders to be meaningfully higher, I would say, in FY '27 than they were in FY '26.

And our final question comes from Ben Bollin with Cleveland Research.

Chuck, I'm interested in your thoughts on this incremental demand that you're seeing, urgency around some of the newer variables, such as Mythos. Where do you see the customer budget coming from? What are they doing to fund this stuff? How are you capturing more of that opportunity? And then I have a follow-up for Mark.

Do you want to go ahead and ask the follow-up, and then we'll get it over to them.

The other question would be, if I look at -- he said really no issues on lead times. Could you discuss where lead times are for your non-Silicon One product versus Silicon One products? And then just spend a little bit more talking about that direct line of comp, communication with TSM and how that influences lead times?

So let me talk about increased demand and where the budgets are coming from. So I'll just give you an example. I had one of my CEO friends who runs a major manufacturer in the United States who -- their team called early on in the Mythos wave and just said, "Hey, listen, we got to some of this stuff that's passed LDOS, which is last day of support. We got to get it out. And that was their team calling. So I in turn texted the CEO and said, "Tell me what you're thinking". And they said, "Well, I just -- I want to make sure that we're getting this equipment in here. We've got to get this done. And I think the whole discussion of where the budget comes from is -- it's not even an issue. I'm sure they figured out behind the scenes, but I think they start from the premise of we don't have a choice and then they figure out how to fund it. And I think that's just a much different place than we have been.

Now right now, the customers have been doing a lot of analysis with our teams. We've got 8,000 or 9,000 customers running Cisco IQ today that are actually assessing their infrastructure to understand exactly what they have, what's patchable, what's not. And -- but again, we haven't seen material Mythos or last day of support in our numbers to date, but the pipeline is building as we think about our teams. The other thing to just contemplate is that we have the ability to go after the equipment -- our equipment sitting in our customers' base this past last day of support, but our competitors last day of support is also a market opportunity for us. And this particular customer talked about their manufacturing floors and some of their competitive gear that was all passed last day of support some -- from one of our competitors that they wanted us to repeat as well. So I think they're just figured out, and it's going to create a movement of dollars internally from other budgets to IT. I just think that's fundamentally what's happening. Mark, do you want to talk about lead times, and I'll help if you need it.

Yes. So thanks, Ben. Again, just to reiterate, not seeing any significant lead time issues at all. I think we've got some tightness, obviously, in some parts of the supply chain. I'm not sure I would even say constraints. I would say that I'm not hearing any escalations from customers on lead time issues, if you will. And so we feel like we're in really good shape there. On the TSMC specific question. I think that the biggest thing is we're not waiting on any sort of allocation and commits and de-commits if you will, from from any merchant silicon providers. We're dealing directly with TSMC. Jeetu and Chuck have been directly engaged and I know we're spending time with them.

We have a trip planned soon.

Yes. And so I just think that it's important from the standpoint of sort of managing our own destiny and controlling that supply, but also our own innovation pipeline and being able to have that much more control over that. I think those are the two really big things early on. I think in out years, you're going to see, obviously, I think, some some avoidance of stacking margins with merchant silicon as well, but that's kind of down the road just a little bit.

I want to hand it over to Chuck for some final remarks.

Yes. First of all, I want to thank you all for being on the call with us today. I'm going to make a few comments here because I think it's important. I think it's an important thing for us to step back and look at how we got to where we are -- and not just -- I want to make sure we're not thinking that we're accidental recipients of what's going on in this AI transition, particularly as it relates to the hyperscalers.

For those of you who have been on these calls since I've been CEO, there were first several years, I talked about our situation with hyperscalers, our lack of relationships with them and our lack of business from them. And if you go back just over 6 years, we had virtually no business with them inside their data centers. We had a little bit of enterprise technology that we were selling them and through a combination of key investments and acquisitions that we made in Silicon, Optics and Security. We obviously rebuilt our relationships with our hyperscaler customers. We told them we'd meet them where they are by selling them silicon software or systems or any combination of those. We worked hard on moving our products to a platform approach that Jeetu and the team have done a great job on, and we assembled the right team to execute and help achieve this breakthrough scale that we're seeing right now.

So I just want to congratulate the teams on all the things that have been done over honestly over a decade to prepare us for what's going on today. It's clear that the demand for our tech is stronger than ever. I think our results are evident of that. We certainly feel the continued AI momentum hyperscalers, enterprise, the neocloud, sovereign telco, everywhere refresh opportunity is in its early, early stages. We do believe that this supercycle is underway, and we think that the network remains an absolute critical factor as to whether AI deployments succeed or fail. So we view that role as critical. We view our responsibility to deliver secure networking for every AI deployment that our customers choose to deploy. And I want to just reiterate how proud I am of our teams and how optimistic I am for what's ahead in FY '27 and beyond. Thank you.

Cisco's next quarterly call, which will reflect our first quarter FY 2027 results will be on Thursday, November 12, 2026 at 1:30 p.m. Pacific Time, 4:30 p.m. 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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Sami told me he is missing the sell-side, so I asked him to join and ask some questions.

Yes, I could not let Tom and Peter have all the fun. So I was like...

Right, I'm joking. So thank you very much for joining us. I'm happy. I'm so glad and grateful for Cisco for joining us because they had their own event and they joined us, kind of, to the third day. Peter Bailey is SVP and GM of Cisco Security, and I'm happy to actually speak with you now because as you articulated on the last conference call, we are going to see better growth. So the purpose of the call is really to understand Cisco's Security business to understand what drove the slow growth before and what is driving the acceleration of growth in the future, to understand the portfolio, the target markets, et cetera.

And the -- I'm going to start with an easy question just because maybe there are some people that don't understand the story. And the easy question, of kind of, just to start the discussion is what's in your portfolio? Meaning, can you think -- can you articulate the portfolio and the portfolio strategy? Where are you going, what you're going after?

Sure, so I'm about a year in. So have kind of had the chance to kind of really get my arms around the portfolio and make some changes. And so there's 2 big chunks of Cisco Security business. It's sort of what we think about as our NetSec, which include Zero Trust and identity, and there's some network detection response things there and then obviously the Splunk business. And so if I kind of really dig in on the first one and then the second one, we've reorganized our business around sort of 3 pillars. They are hybrid mesh firewall, if you understand that Gartner terminology, which is basically firewall as a mesh across physical, virtual and even workload levels.

Zero Trust, which is Zero Trust Access and more -- and then we had identity as sort of our third pillar, but more and more identity as really a foundational element because we see identity as being critical for how we're going to secure agentic environments going forward. Because everything needs an identity, whether it's a machine, an agent to human, what have you. And so identity is -- and then there's sort of some cats and dogs parts of the business, which is more of the legacy stuff. We had some e-mails, media or things like that. But those first 3 are areas of tremendous focus of ours. And we reorganized R&D and our focus around those 3 pillars. And when we get to kind of performance, we're seeing performance based upon that focus.

And then, of course, you have the Splunk business. And there's really obviously the existing business, but really the opportunity then to dramatically expand what Splunk is doing in terms of being more of a broader data fabric to get signal, not just from sec-tech, but also from machine data and telemetry from workloads because that visibility across all the infrastructure is one, critical if you're going to get in secure AI, which is traversing everywhere. And two is also the way we're going to be able to start training AI, you can start beginning to automate the visibility and management of that infrastructure.

We did research, I don't know, maybe 2 years ago, maybe 3 years ago, and we looked into your security portfolio and back then we estimated. Of course, we don't have exact data. But based on market share data, we estimated that over 70% or 70% of your revenues came from appliances. Where are we today? And I'm not looking for the number. I'm looking for how is the -- how did the portfolio evolve from on-prem appliance to be cloud service and software, et cetera?

Yes. So listen, we are really focused on and this is going to be kind of an avoidance to your question, but I will answer your question. We're hyper-focused on customer outcomes across some certain areas, and that includes the delivery of hardware and software, in some cases, just software. Cisco is also -- needs to be a multi-cloud business. It can't just be on-prem. We have to be thinking about private, but our customers have assets in the cloud as well. And so as we extend our capabilities beyond just a physical device, it has to be software that is traversing multi-cloud. And so that is a key area of focus of ours.

And so we don't sit around and think about our business in terms of hardware versus software because these are highly integrated solutions. But we obviously are seeing more and more uptake on pure software. Zero Trust, obviously, is completely a SaaS solution and sitting across network infrastructure. And so that business is absolutely growing as a consequence of where we're reaching out and where we're serving customers.

So I've been talking to G2 for, I don't know, so many years about the strategy. And the strategy was always articulated well. But the execution numbers got to negative levels. We got to minus 4% and minus 2%. Why did margins get to negative territory in a solid environment? Security is good. And how does it change? What drives the change to the growth trajectory?

So listen, I think, if you go back in time with Cisco, 10 years ago, I think the business was very strong in firewall in these areas and somewhere in the middle of the last 10 years, that changed, right? And in the last 3 years, since Tom Gillis, who I report to, and before that G2 started refocusing the business. We started seeing this narrowing of focus on excellence and execution around the areas I described. And I probably added a bit more focus to that since I've been here. But listen, I think we've got a very, very strong portfolio today. I don't know if that was true 3 or 4 or 5 years ago.

We have continued to really focus our execution across those pillars I mentioned. Those 3 pillars are 86% of our business today on the SBG side. And so I think that execution. And then the second piece of this, obviously, is that the more and more we are infusing security into the network architecture into how we design networks and how we design the data center there's obviously a much easier selling motion there for our go-to-market, and that you're seeing that play out right now.

So on the last call, you noted -- the company noted that you expect security to accelerate. What drives it? What drives acceleration?

So I think, listen, first of all, the market right now is obviously very, very strong. I think with the advent of sort of agentic, the number of security problems are growing dramatically, and they're very extreme. And with all the money going into the ground to support AI infrastructure build-outs, if we can't secure these use cases, it's going to impact the ROI on those investments. And so there's tremendous pressure. If I go talk to a large customer, the CISO is under tremendous pressure to figure out how to make AI use cases secure for their environment because the Board and the CEO is pushing so hard on that. And so in general, we're seeing an additional ramp-up of security. Our positioning within sort of a securing AI, I think, is very strong, that is obviously helping the growth of our business.

Got it. And maybe a question to Sami because I have you here, Sami, we always -- I always ask you about the mix and meaning how is mix impacting legacy versus new. And there was also an issue that the recurring revenue, or the ratable revenues are going up, but it takes time to ramp it, where are we in the cycle? Meaning where are we in the cycle? When do you expect all the good things that happened in the last 3 years to translate into growth acceleration?

Yes. To start, Peter is talking about the market is typically strong. And then what we have in the security business is really the 2 buckets. We have the Cisco core, that will be the Splunk category. The reality is we have still a couple more quarters of difficult compares mainly hitting these tough comps that really are affecting us on the Splunk side. But by the time we get to fiscal 2Q '27, these mix compares become a lot more normalized. So you will not be dealing with these very difficult compares side by side. And the Cisco Security core though, you're already starting to see some improvements, and that's starting to drive some better performance.

Part of that was seen in Q3, and then like we've discussed in our live call that we do expect that to continue into Q4. And this kind of gets us to a much better position, but kind of exiting FY '26 and starting FY '27, the mix and mix compares will start improving, the ratable composition will also increase. So you have all these factors that have taken a lot of time, but we're finally getting to a place that we're feeling very comfortable. This really gets us into the first half of FY '27, where we're going to be feeling much better about how things look.

And if I might add to that, just one more comment is when I -- even a year ago, I think Cisco was not so much in the mix in the security conversations. And we are very much in the mix today. And so talking to our customers, the CISO and the CIO are much more in the same room these days because security needs to be considered in thinking about these AI rollouts and those conversations are very robust for us on the security side as well, and that's really encouraging.

So actually, that's I wanted to ask you about it. If I asked your competitors, any security company, where is Cisco in the market, they would tell you how we're taking share from Cisco. How or where are we now when it comes to your position, and I don't even know how to articulate the question, but I think that you just -- you just said it, I want to basically go deeper into it, where are we today in the completeness of our portfolio and the vision of our portfolio and execution, your ability to execute when it comes to positioning you back the way you used to be 10 years ago as the leading cybersecurity company?

So a couple of things. I think when we talk about relevance and positioning, we also have to look at the market we're in right now. And so the next 6 to 12 months are going to be dominated by Mythos, vulnerability management, vulnerability packaging and shielding and it's going to be about securing AI, right? And so in the context of that, infrastructure is the front lines of the Mythos concerns. And Cisco is -- we've just announced Live Protect. We have some very effective solutions for how to protect infrastructure and that we're rolling out.

Secondarily, we've got technology like Isovalent or eBPF agent capabilities that is very, very effective at shielding and protecting applications. And you're going to see us continue to push forward on that. And then relative to AI security, whether it's infrastructure, whether it's a workload, whether it's Zero Trust Access that now has agentic controls where we can authenticate an agent, authorize an agent, monitor its behavior and be able to enforce policy on an agent that is a very critical capability that our customers are asking us about.

And so what I would sort of say is the market is changing. The good news is that we saw some of this change coming, and we've been able to reposition ourselves for this part of the market. And I think the market looking backwards at the silos of firewall or EDR or NDR or what have you, there's going to be consolidation here because what really needs to happen is we need much more broader set of sensors that can be everywhere.

By the way, the network is everywhere. We have visibility everywhere. We need sensors everywhere, we need enforcement everywhere and we need to have the intelligence to understand what's going on in the network to be able to secure AI because it traverses trust foundries, it traverses a single control and these silos start to fall apart. And so we are very well positioned to take advantage of that.

Got it. And this week, you had Cisco Live. What was your key message on cybersecurity in Cisco Live?

I think, again, Mythos has been dominating the headlines and again, I think that's going to be something we're operationalizing with our customers over the next 6 to 12 months. As the concerns which are merited by the way, around advanced threat actors using these types of models is number one. Live Protect was associated with that. I think that was a really exciting announce for our customers because this means we can actively start defending their infrastructure going forward. And then obviously, the agentic security things that we're doing.

So we've really made some significant advances around how we can identify and help secure agentic activity on the network, and we're manifesting that through, whether it's traditional firewall capabilities that have the ability to sense, Zero Trust Access. We also launched an agentic app that sits across all of the platform. And then the third one is platform.

Cloud Control, which is all of Cisco coming together through a platform experience very, very valid for security as well because in the background, we can start integrating data plans. And when you integrate data plans, it's much easier to do analysis across many different use cases. And that integration is how we can create really integrated use cases from a customer experience perspective that leads to, frankly, just better outcomes and better user experience.

And why are you positioned well for this, meaning why you and not someone else? What do you have in your portfolio -- it could be the legacy portfolio, it could be switches and routers, it could be in security control. But what do you have in your portfolio that makes you in a better position to benefit from all these changes because of AI?

Yes. So I think it's a few different things. But first of all, we are leveraging the network, leveraging our position there, leveraging data center infrastructure. One of the demos you might have seen is that we're actually putting little baby firewalls in the Nexus switches, right, the smart switches, right? And that allows us to start having a much more distributed security presence, right? And so the key message is security needs to be more distributed. So we have visibility everywhere. We have sensors everywhere. And because we own the infrastructure in many cases, we can put that in place. And I don't know if anyone else can say that, right?

So we can really take advantage of ownership of the infrastructure. And then we can still connect that back to if I need to -- and again, remember, data is going to increase 10x, 100x, depending on who you ask here in the future, are we going to create a firewall that's 10x the capacity or 100x? No, no, we're a lot smarter about how we route traffic. We're going to be sensing traffic. We're going to be identifying a small percentage of it maybe to route back through a firewall to do deeper inspection. But it's going to be much more about distributed security where things are happening at the edge. And if you look at the investments we've made, if you look at how we position our portfolio, that is a very big differentiator for us. And then when you add in firewall Zero Trust identity to this picture, you get to see a much broader portfolio that can come together and work together.

Got it. Splunk, take us through the Splunk journey, meaning what's happening in the company? Splunk security just security. What's happening there, Sami spoke about the transition. But what is this transition -- and how long does it take to go through it? And what's the risk in the transition?

Yes. So we're going through a phase journey as an industry to automate the SOC, right? And Splunk is aggressively investing to do the same work, right? And the fact that we have as much data as we have puts us in maybe a better position to train models faster, get agents more proficient, faster, reduce false positives and the kind of work that they do. And so I would say that, that is a tremendous focus for that business over the next year to 2 years to continue to automate that. And then the second piece is really expanding the set of use cases we can support across things like AI observability, the Galileo acquisition. We need to have visibility everywhere so that we can drive security outcomes on top of that.

So being able to incorporate data, plug-and-play across just the Cisco infrastructure, obviously, that's basically done at this point, but across all other sorts of infrastructure so that we can have that broad view and therefore, be able to create these security outcomes for customers. And so it's a little bit of the same playbook we've had historically there, but with a much broader view. And then we're putting automation on top of that. And listen, if we look out 5 or 6 years, agents are going to be driving these things, right? We're not going to have kind of as much human-led workflows here, it's going to be agentic by nature. -- and you're going to then be looking at dashboards that are going to show your NIST compliance and other kind of audit compliance. And that is the vision we see, that's the journey we're on, and we're working towards that.

Right. And maybe a question for Sami. Sami, we spoke a lot about it in the past. Take us through the numbers, again, not from a numbers perspective, but just conceptually, why are we seeing this deceleration and then acceleration? What happens behind the scenes that creates this kind of volatility in growth rates?

I think the biggest driver is how customers want to consume Splunk. So when Splunk was a standalone company, they were able to manage the business 50% term software, 50% cloud. And they really ran it down the middle because the company had a different mandate than what Cisco altogether has. Since we've given the customers the freedom to really decide how they want to consume the product, they've opted more into the ratable scheme. And that's -- I think you've seen like that accelerate, right, especially in FY '26. And at some point, the mixes will become more favorable, and that gets us into the first half of FY '27.

Let's see if I can add any additional elements here. The other thing is, I mean, like exactly what Peter said, right? Like there are a lot of changes happening -- and also, I just want to connect one other thing is Cisco has the switching. We have the telemetry, domain knowledge. We have the security offerings on top of that. We've made all these very proactive investments to get ahead of it. And an additional thing that I think people are forgetting is we also have our own silicon. This just gives us significantly more vertically integrated programmability into the stack. And if you think of like networks running hotter with agentic flows, hotter just means more demanding networks with lower latency requirements. If you own every element of the stack, you're going to be able to put out some very compelling products.

And is AI playing to your strength of having control over the stack? Or is AI irrelevant for it? Or is it -- how is AI playing -- or how do you benefit from AI given that you have full control of the stack?

There's two things to look at this. From the customer lens, they are assessing various tools, and they're going to have very significant requirements to mobilize and tool AI technologies. Cisco can be the main vehicle to allow that to happen. Then on the flip side, internally, we are using a significant amount of AI tooling to develop our own products and also help us accelerate key parts of the company. So Cloud Control as well, and G2 has also talked about developing products almost completely using AI software, right, like AI tools. So there are kind of two parts to this, and both parts kind of get us to this very compelling delivery and matching what we can offer versus what customers actually need right now to adopt these technologies. So there's a bit of a 2-sided focus here. And then I think silicon and the stack really plays into that.

Got it. Peter, the question. So last year, I spoke about Hypershield. I spoke about XDR, SASE. I spoke about new products. Give us an update on your new portfolio, meaning the take rate and what you've seen with Hypershield and SASE and everything else.

Yes. So Hypershield is part of that hybrid mesh firewall kind of category, right? And so think about it as our next-generation workload security and distributed security. And so what I would say is that the Nexus Smart Switch and what we demoed here at Cisco Live represents one of the big outcomes of that effort. And so think about are you going to buy a data center switch that is classic switch or one that also has firewall capability built into it using that technology, okay? And then the second piece of that is when we look at all the vulnerabilities that primarily like Linux-based applications have that is sort of the thing that everyone is focused on right now because of Mythos being able to use that agentic take -- that agent technology to be able to shield those applications. That is also something that we are doing.

And so Hypershield is finally kind of coming into its own and the execution there was slower than what we had hoped, but it's the right idea for the right moment. It's a distributed strategy for doing enforcement, whether it's policy enforcement or segmentation. And so that is as we kind of think about sort of the future, we think that's going to be kind of a ramping aspect of that mesh portfolio. But the mesh, it's physical firewalls, it's cloud firewalls, right? It's things like Hypershield. The thing we've also done is we created a single policy plan for all of this.

And so a lot of times, customers struggle to operationalize all these things because everything is a policy or a rule. And historically, this has been sort of a rules and policy based business that is very complex to manage. And so through AgenticOps and through integration of a single policy plan, we've also dramatically simplified how customers can operationalize it. Because at the end of the day, you're going to need thousands of these sensors out there. And this distributed network of sensors, that's really tough to manage. It's just a human writing policies. And so a unified policy plan and then be able to start automating the writing of those policies and managing those policies and we're on that journey, too.

Who is the customer? Or what kind of deployments do you address with the smart switch, meaning who needs a switch together with a firewall?

I mean as you're building out data centers, you're looking to protect workloads segment the data center? I mean, it is the perfect solution for that.

Got it. And that is basically enterprise data centers.

Yes, yes. Yes.

Okay. What about legacy firewalls? I mean it's a big part of your business. You're still -- you have -- although you lost some share in the last few years, you still have -- you're one of the big players in the space. What are the trends with legacy firewalls and what are the trends also in terms of your portfolio? How did the portfolio evolve?

Yes, sure, sure. So we just refreshed the whole line. So I would say like there's nothing legacy out there anymore, but we literally refreshed the whole line. And listen, these are very, very advanced products that high throughput doing deep packet inspection. We've built incredible ML models that can do on-the-fly detection of threats and what have you. And so these are very, very sophisticated solutions that are designed to operate in line, right? And so that is still a very core requirement. And we're -- I think you saw this last quarter, we actually saw a very, very strong growth in that business.

And so I think that's a very viable part of the business going forward. But I think it's an end -- answer -- or question and answer is that -- it's not enough, right? And that's where we have to try to think about these more distributed means to actually be able to do security more at the edges of the network, in the data center, protecting workloads and those things can all work together. So I want to make the point that it is not a siloed product for us. This is part of this mesh strategy. All these things working together, policy, we can write policy once and enforce it across all these services.

Got it. Agentic AI security. So companies start to make acquisitions in general in the space, companies start to make acquisitions in the space, you made acquisitions in the space. Articulate your position and your vision to secure agentic AI?

Yes, sure. So to secure agentic is really, first and foremost, about identity, believe it or not, right? You need to basically always understand exactly what the agent is, what it should be doing, what it's connecting to and what have you. And so our strategy is to take identity and make it a horizontal across our platform and our infrastructure so that our customers know everything an agent might be connecting to and not just a simple identity but actually rich metadata about that identity. So you actually understand okay? This is a workload that's running very sensitive information, and we know that sits behind a certain network and what have you.

So that once you do introduce agents, and I'll get to the agentic piece in a second, we have great visibility about what's happening on the network. So for agents, we have introduced so far through Zero Trust, also through just our identity stack the ability to discover, authenticate, authorize and now start managing the behavior of those agents on the network, right? And so that agentic strategy, which, by the way, can be enforced by what we see at the workload level, it's enforced by how we authenticate and bring them through identity into the network and then the ability to have visibility in firewalls to see agentic traffic, to see MCP calls to see tool access. We've introduced DefenseClaw on the endpoint, but also looking at what's happening on the endpoint.

All of these things, again, working together to be able to see agent activity across the network. And then on agentic app, we just introduced that brings signal from all of these products. So cross-cuts everything. It's not a siloed product. It cross-cuts firewall, Secure Access, Zero Trust Access, identity to present a view of what is happening with agents on the network. And again, I think one that's very unique. Two, because we own the network, we also can see things, others cannot. And we can bring in all this signal to give that perspective and that's going to be absolutely required for securing agentic going forward.

Is this an opportunity that is here and now? Or is this an opportunity that is in the future.

This is an opportunity right now. Like we are in many different customers -- like so AI Defense is an example, a product we built for builders to safely build applications. That's a product that's a little over a year old and has a huge pipeline and backlog. And there is a right now conversation, the ability to use Zero Trust Access to control and monitor what agents are doing on the network. That's a right now conversation. And so every one of our customers begin -- remember what we talked about at the beginning, the CISOs are under incredible pressure to adopt these technologies, but also to secure them. And so this is very much a right now conversation.

You previously noted it used to be good, but it is coming to me. You previously few quarters ago, you spoke about pressure on cybersecurity from federal government. And it's a big part of your segments. So give us an update on, if you can, please, on the federal segment or a federal part of cybersecurity.

Well, I think the thing everyone has seen as the orders coming down from the federal government to update infrastructure to make sure it's quantum ready and to really get rid of all the LDOS last year support type infrastructure and upgrade that. And so that is sort of probably the headline to the answer to your question. And so with that, we are bringing everything we have to bear to help support the government in making those changes as well as having lots of discussions around what else do we need to do, for example, to help protect in kind of Mythos type scenarios. And a lot of a lot of discussion with the government and other vendors, too, around how we're collectively going to help solve some of these problems. And I think that, again, is going to be a big topic for the next 6-plus months.

I forgot to ask you something about AI when we spoke about -- is it -- is your -- what you're doing in AI? Is it synergistic to what you currently have? Or is it just a stand-alone opportunity that is now growing?

So if you remember the description, hopefully, it landed of the agentic app. So imagine you've got this view into what our agents do on the network, what it's connected to, what tools it's using. Maybe it's associated with a user. All of that is a signal that's coming from the products and infrastructure that Cisco is deploying, right? And so whether it's Secure Access or Zero Trust Access platform, whether it's identity, whether it's coming from a firewall whether it's signal we're getting from a workload or something is interacting with the workload, looking at the process flows. That is all signal we're bringing up to give you the agentic view. And the thing I want to sort of reinforce is you need great breadth and depth to secure agents. If you're just an identity player, you can't see what happens past the trust boundary, right?

So you have to have great depth and breadth. And because we are at the network layer all the way up to L7 in the stack, we have incredible ability to operate all areas in the stack to give this comprehensive picture to our customers about what agents are doing on the network. And agents are going to go everywhere. They're going to do things we don't want them to do. We're going to have to be able to enforce everywhere, have visibility everywhere, and that is really the ecosystem that we are building.

So maybe -- last question is not about products and portfolio. It's maybe about your go-to-market and your ability to deliver, to execute on your strategy. Where are you in -- what do you think about your own strengths and weaknesses when it comes to go-to-market for cybersecurity, not Cisco's in general, yes?

So listen, we have, I think, in my personal opinion, the world's best go-to-market, it's an incredible sales force. Our DNA is the network and infrastructure, right? And so a smart person running a site security business in Cisco will do whatever they can to attach their train to what's happening on the network side of the business. And so when we're talking about fusing security into the network, that is really a security story that goes with a network sale and infrastructure sale as well. And I think that is landing for us. But really how we think about it is once we are in with a customer, we have some security offerings that might be outcomes that are tied to the network as an example or might be outcomes tied to Splunk, which is broadly deployed.

We have this vast portfolio, we can upsell and cross-sell that is integrated with whether it's the network or with Splunk, to help solve these new use cases we're talking about because security typically is about what's the house on fire thing I need to solve today? What's the new attack surface, right? And everything we talked about today is that new attack surface and we can tie that back to the infrastructure, leverage the infrastructure and the network to deliver those outcomes. And so that allows our go-to-market to actually have a very integrated sale process going from what would be kind of your network sellers into our security sales force. And so putting those 2 pieces together is obviously really important for us.

Got it. So Peter, thank you so much and Sami. We ran out of time. Thank you.

Great, thank you. Appreciate it.

Good afternoon, everyone, and welcome to keynote session at JPMorgan Technology Conference, and I have the pleasure of hosting Cisco Systems with -- on a keynote on securing and scaling AI. With me is Chuck Robbins, CEO and Chairman of Cisco Systems. Chuck, welcome and thank you for coming to the conference.

Thanks for having me. It's great to be here.

Yes. Our pleasure. Maybe I'll start you off with something you said on TV after your recent earnings win, which, by the way, I think anyone I talked to even outside technology took note of. It's great when energy analysts come and tell you Cisco had a great print. You know that it's gone well. So maybe you did mention on live TV going through a networking super cycle. Maybe just flesh that out a bit or unpack the various factors you're seeing the confidence that it is a super cycle as you see it.

Yes. So I think the notion is that with this AI revolution, everything is dependent upon the network and everything is dependent upon modern networks, secure networks, and this whole notion of the node has a certain amount of power, but when you network the nodes, then you get exponentially more power. And so we see this happening in and you think about what's happening in the hyperscaler business, which we took our AI infrastructure target up to $9 billion for the year from $5 billion. And then you look at what's happening in the enterprise space. And you've got every enterprise was previously focused on modernizing their infrastructure in preparation of AI.

Now we got the Mythos issue that we can talk. You've got sovereign clouds that are popping up. You got neo clouds. So they're all networking dependent. And then you have public sector organizations all around the world that are looking at all those trends that we just described. They're also gearing up their infrastructure for defense reasons and other reasons. So it's just -- everything seems to be moving at the same time right now. So I just call it a networking super cycle. I didn't know it's going to get picked up like that, but it's -- I guess I shouldn't say this, but I've been in this business since these networks started to exist. And obviously, the dot-com era was one thing, but this is something that I think even subsumes that.

So maybe let's talk about AI. You mention it as one of the drivers. When you think about the magnitude of changes, and everyone wants to know what are the magnitude of changes you foresee coming through. How would you compare that to the magnitude of changes the industry's gone through since the early 2000s. Clearly, a lot of investors want to compare it to the early 2000s. But how do you -- when you think about the next 5 years, how would you describe the magnitude of the change we're going to go through because of AI?

Well, I think it's -- it's a combination of 2 things. It's bigger than anything we've seen, and it's happening faster. So when you have that occur, it just blows away anything that we've ever seen historically. And I lived through the dot-com days. And in those days, you had customers that didn't have the financial fortitude, they had an idea. They had a plan and they needed networks, they needed to connect. Today, if you look at most organizations that are investing heavily right now, they see this transition as being existential to their success and they have some of the best balance sheets in the world. They have the highest cash flows in the world.

So it's -- from that perspective, it's very, very, very different. You have some start-ups in this space, obviously, but I think that in general, it's different in that the companies that are spending most of the money or a large percentage of the money are very well funded, very successful companies that have been -- that have shown their ability to navigate different trends like cloud and others. And I think that's just a meaningful difference than what we saw the first time. And it doesn't mean that -- you get a lot of questions about it, is this a bubble or not? I don't even know what that means. But I mean, there will be misplaced capital. There'll be companies that won't exist that will try something that doesn't work out. And I think you'll see the winners emerge just like we're beginning to see now, and then you'll see them succeed as we go forward.

Let's layer on agentic AI on top of this. What kind of changes does that bring? How does corporate America then sort of function with agentic AI? What does it mean overall for enterprises like even JPMorgan like how things work eventually?

Well, I think what it really does in our world is it drives home the absolute requirement to have security merged into the network, fused into the network. We've said that for a very long time and agentic actually makes that a requirement because these agents are going to be moving and processing and working in your infrastructure independently, and there's absolutely no way with the latency requirements particularly as you get into manufacturing and you get into robotics. There's no way that you can conveniently route this traffic through appliances to apply security policy against it.

It's going to have to be done in the network. And so a lot of the work we've been doing with smart switches and merging security services into our networking platforms, starting first in the data center and then moving out into the campus. And people originally didn't understand why we would do it in the campus and now with the agentic applications, particularly at the edge or robotics manufacturing and those kinds of things, you're going to see the need for that in ways that we haven't yet. And I think that, as I've said before, none of my networking competitors have a security business and none of my security competitors have a networking business.

So we -- assuming we execute well, I think we're going to have great solutions in this space for our customers. And if you look at the smart switch technology, which effectively is either CPUs or DPUs built into these networking products so you can run security services in line at line speed with no degradation. As a percentage of what we've sold, our customers have probably bought 5% of what they've been buying has been the smart switches, and we think that's going to escalate pretty quickly.

So when you think about scaling AI, clearly, supply chain is emerging to be one of the bigger topics as well, along with revenue acceleration, we are seeing maybe potentially worsening supply constraints for the industry. You highlighted on the earnings call last week, the magnitude of advance purchase commitments and inventories that you're sort of accumulating just to be able to address that. When you run the company and the supply chain the size of Cisco, how has that changed over the last 5 years? What are you having to take note of now that you probably didn't need to 5 years ago?

Well, if you go back 11 years ago, when I became CEO, I can tell you I knew very little about supply chain. And now I know a lot more than I ever anticipated that I would know. Mark, our CFO, will be up tomorrow, and he'll talk a lot about some of the purchase commitments and inventory levels that we drove. But I think in a simplest form, we have a world-class supply chain team that's been ranked #1 in the world by Gartner on multi occasions, and that's across any industry. So the team is very good to start with and I honestly think what's happened is our supply chain has now turned into a competitive differentiator for us.

And we're leveraging our balance sheet. We're leveraging our size, we're leveraging our ability to get ahead of this. And so if you look at some of the creative things we've done, we've actually -- I never dreamed we would be making equity investments into companies in our supply chain in order to help them diversify geographically in some cases or in the case of a recent investment we made with Nanya, it was connected to securing memory supply which is a big issue right now.

And I know we'll talk about it, but the other big thing that has completely changed our supply chain dynamics is Silicon One is having our own silicon. We have a much higher degree of control over our supply chain and I think that's something that's helping us right now as well. But I think the big difference is that it used to be that you only heard about supply chain when something is screwed up. Now I think it has gone from that to being a competitive differentiator for us as we move forward.

So let me follow up on that and bring Silicon One in as well. One, it sounds like you think supply constraints are now structural, given the demand we are seeing. Silicon One stands out to be what helps you as part of that differentiation. And then maybe flesh out the Silicon One, your thinking on the road map and how does it position you in this AI sort of demand infrastructure, demand landscape relative to your competitors?

First of all, if we didn't have our own silicon, the $9 billion that we announced would probably be close to 0 because we would simply be a sheet metal distributor of merchant silicon. Because when you look at what hyperscalers are looking for, the value in the products are either in the software or are in silicon. The rest of it is important, but the real value are on those 2 things. And many of them have moved to their own proprietary operating systems that all expose APIs so that they can build their automation platforms and their management platforms.

So if you don't have software and you don't control your own silicon, then your future role in these networks, I think, is just going to continue to diminish. So we're very fortunate that we made the decision in 2016 to acquire Leaba. And now what that's done for us is allowed us to build a single silicon architecture across our portfolio. And by fiscal year '29 -- we're ramping up fiscal year '26 now by fiscal year '29, all of the high-end systems across our entire portfolio will be powered by Silicon One. And so in fact, I did bring one, you got to have props, right? So there's a chip...

I don't know if you can zoom into it...

Yes. You can't see it much, but it's not Cerebras, right, but it's really turned out to be an incredible differentiator for us. And what it allows us to do now is in our traditional business, you have the systems, the silicon, the software and the entire stack for our enterprise customers. And then when you get into the hyperscaler, we made a decision in 2019, and we launched and told them that we would sell them our technology in whatever way they wanted to consume the technology. We'd sell you a fully integrated system with silicon hardware and software, we would sell you our software, if that's what you want to buy. We would sell you just our silicon, if that's what you wanted to buy.

And I think that gave them a higher degree of confidence that we were serious about really meeting them where they were. And we really -- anybody who heard me talking about this 7 or 8 years ago, I was very open about the fact that we had missed the cloud revolution, and we missed and the relationships weren't where they needed to be 8 years ago and now fast forward all the hard work and all the time we've spent there and listening to them, making sure our ears were working and making sure that our actions were aligning with what they were telling us they needed.

These customers are big enough, you can look at each one as a market of one. So if you look at it as an example, we did announce a restructuring of something less than 4,000 jobs in Q4. And part of that is we need to fund more silicon tracks, you have to almost run these things concurrently now with the speed at which these things are changing. So we did that in order to fund silicon optics. We haven't even talked about optics yet. I think we had $1 billion-plus Acacia quarter on long-haul optics and then AI and internal AI tooling and things of that nature for our employees. So -- but I think the silicon side is probably the most meaningful differentiator we have right now.

You mentioned the hyperscalers. We all look at their CapEx outlooks and can figure that they have aspirations of scaling very quickly. Supply chain aside, how do you think about what are the other hurdles they need to overcome to be able to scale relative to their own aspirations where they want to go with their scaling.

Well, I mean, clearly, energy is emerging as one of the biggest. So I think supply chain, energy, I think the -- but the technology and the scale is just moving at a pace we've never seen before. And when you look at in the hyperscaler space in the last quarter alone, the way they award business is they give you a design win and that's sort of like think of it as a franchise inside of their infrastructure. There's defined sort of places in their infrastructure. And we were awarded 5 of those last quarter. Two in the optics space and 3 in the system space. And one of them was with this little chip, which is a G300 and then the other 2 were with a chip called a P200 and this gets back to your question.

The P200 is for what's called scale across technologies, which effectively is connecting multiple AI data centers together. So basically, these models and these clusters are no longer, in many cases, fitting inside a single data center so they're expanding them into multiple data centers and they need scale across technology and that P200 is our first silicon that was custom built for scale across use cases. And so that's helping them alleviate those kinds of issues. And we won -- 2 different hyperscalers with scale across use cases in Q3. And we also announced on earnings last week that we also have been awarded a third hyperscaler scale across architecture in the first couple of weeks of this quarter. So I think if you look at energy, you look at supply chain, you look at just pure location, geography, the population impact and the general belief of local citizens about whether you should be building data centers. I mean, all those things are becoming impediments, which is why there's just a lot of discussion about potential for data center pods in space or whatever those may look like so.

Yes, yes. So maybe let's go back to optics a bit. When you're helping your customers scale, optics and systems both are playing a big role now. I remember a time when Cisco had stopped talking about optics. And clearly, now the vision of putting these 2 together has worked well for where we are headed. Where do you see synergies between optics and systems? How is that playing out across the portfolio with your customers, particularly as you look to help your customers scale?

Yes. I think we made a couple of very strategic acquisitions over the years. One was Luxtera and one was Acacia and odds and ends around it. And they've turned out to be -- again, we had great rationale for making the acquisitions then. We had great rationale for making the silicon acquisition in 2016. But in today's world, they look even more brilliant than they were at the time. So I give my team credit. I'm sure they saw that coming. But if you look at the beauty of the optics are that they work -- these pluggable optics work with any vendor's equipment. So when we win, we think there's a high likelihood that those customers will plug the optics in and the optics is at least equal to the size of the networking spend of the switching spend.

So you really double your addressable market by having both and it's -- so we sell them when our competitors are being chosen for use cases, and then we sell them for our own connectivity. And it's critical to have both when co-packaged optics actually comes to fruition or some of these other emerging optical technologies. The fact that we own both really gives us a massive differentiation as we look to serve these customers more effectively.

Got it. Let me pivot a bit. And I know you've talked about this before, you mentioned this before, Anthropic Mythos model. And how concerned should we be, first of all.

Yes, I shouldn't have laughed, probably. It's just the number one -- we had never heard of it 90 days ago, and it's the #1 topic, ain't that amazing. And that's how fast this thing is. It's the example of -- if you really want to know how fast the markets move and think about Mythos, 90 days ago versus today. And that just tells you where it is. So you can look at Mythos and OpenAI's latest models. And if you're a pessimist, you can create a very, very scary future, and if you're an optimist, you can create a lot of positive ideas about what it's going to enable us to do from a security perspective, et cetera.

And there's going to be a little of both that are going to apply. There is the ability -- they're very good. Just to be clear, we've had -- we had it for 7 weeks before it was talked about publicly. And we have the version that has no guardrails. So it is a powerful platform that, first and foremost, it has helped us running our code through it, understanding where we have vulnerabilities that humans didn't -- couldn't pick up -- it's also very good at creating exploits to take advantage of those vulnerabilities. And so we think using it to help our customers defend against attacks is going to be very important because one thing that a lot of people say, is that these models are as bad as they're going to be right now, and they're pretty good.

And so I think that -- look, what it's really done is it's become a CEO level discussion. The number of CEOs that called me when this hit, who don't -- who still today maybe don't have the model, but they just -- they want to know what they should be thinking about, what should they be looking at? And I'd say there's a few things here. We actually -- we created what's called a harness. And by the way, we restricted usage of this model to our security team only. So no one else inside Cisco has access to this model right now. And they've been running our code through it. And they also created a very sophisticated harness, which is a framework for taking advantage of the model to run your software through it. It's really just -- and we open source it, I think it's -- Sami, what's it called? Do you remember? Well we open sourced the framework last week for our customers to be able to use and it will give them the ability to take any model and actually create this harness, which is what you need to actually really fully take advantage of the capabilities.

The second thing is that we did release a white paper called Shields Up, which is a set of recommendations for all customers as we prepare for this new world of these models. And you just have to assume they're going to be in the hands of our adversaries, they're going to. And one of the big things that is highlighted, though, is the amount of unpatched and perhaps last day of support equipment, technology, not just from Cisco, but any vendor inside of our customers' environments. If you remember Volt Typhoon and Salt Typhoon, both of those had a lot of instances of exploitations of old equipment that couldn't be patched. So we see a lot of customers now who are beginning to really inventory that so we announced Cisco IQ which is something our customers can put on their -- put into their infrastructure and actually begin to -- on the Cisco front, inventory, what they have, give them a view of what's past last day of support, what's past last day of patching, all those kinds of things.

And I think this is going to be, we talked about last week on our call that we really don't have anything baked in for what customers may do from that perspective, but we think it has the potential to expedite the whole refresh cycle that we're going through right now, and we'll see how that goes. But I think Mythos is a -- it's just it's very powerful, and it's going to fundamentally -- and the corollary from OpenAI, to be clear, are both very good. And I think they're just going to continue to get better, and it's just going to require us to operate at a different level from a preparation perspective.

So maybe talk about the opportunity here a bit more one, like any early thoughts in terms of the size of the refresh opportunity about products that have passed EOL and a few for support. Secondly, what does it mean for your security business? Like one is updating the infrastructure. Second, what do you need to do? And what monetization opportunity does it offer you or your security business in the future.

Yes, we're -- we've put together some estimates on how much end-of-life equipment our customers have, and it's a pretty meaningful number. It's at minimum tens of billions and perhaps $100 billion to $200 billion. I mean it's a big number out there. And what we see customers doing now is they're segmenting their infrastructure so that they can prioritize where they go tackle that first. So I'm going to segment my infrastructure and put deep security connections between those 2 segments in my infrastructure so where I'm exposed to the Internet. I'm going to go hard and I'm going to really screen it off from other areas and have a very high security posture when that traffic crosses those zones.

And so we're helping customers do that. I'd say on the refresh cycle in general, we're in the top of the first in baseball jargon. I mean it's early. We've only released some of the early products in our campus switching as an example. So I think you're mid-single digits of what's out there that we need to replace. So I would normally say it will be a very long cycle and it will just be a steady long cycle. With Mythos and whatever else we don't know about 3 months from now, 6 months from now what things lead customers to perhaps move faster, we'll have to see, but it's very early. Now on the security side, we have -- we've now refreshed the entire portfolio. It has been a part of the portfolio that we've been hoping would improve, and it's beginning to show that everything we believe is going to happen, it's just happening at a slower pace than what we had hoped to be honest.

We saw significant firewall growth last quarter. We've seen 5 consecutive quarters of really high win rates against our competition in the firewall space now that they're all refreshed. And I think that, again, when you look at Mythos and you combine the smart switches and the new technology that we had for the campus with our security services that we can run in line, I think it will be good for both our infrastructure as well as our security business.

Let's take a step back. I wanted to get your thoughts on something broader. Clearly, investors are concerned about what AI means for software businesses in aggregate. You have your software business extends beyond security. How do you think about AI disruption risk to software businesses or your own business, however you want to cut it, like give us your broader views of how you're thinking about it?

It's -- so our software assets are largely around security, observability, network infrastructure, monitoring and things of that nature. So they're not the single use case SaaS products, which I think are the early low-hanging fruit for AI to disrupt. I know what we're doing with it internally. I actually reviewed a presentation on the plane coming here today that's going to be given to our Board next week. And I've talked to our team. And I think that the piece of the software business today, that is, I think, most likely and being replaced by AI are these single use case SaaS companies. They're just -- and then the other thing we see is that on some of the major bigger platform players, some new modules that you might have to buy, you can actually obviate using AI in some cases.

So I haven't really -- we haven't had a lot of concern, maybe we should, but we haven't had a lot of concern yet about AI disrupting the software parts of our business. We think AI is going to meaningfully improve our software businesses. And we think that when you look at security as a software -- as software -- the parts of our security solutions that are software, getting those implemented into the network, that's not going to be -- and then working in conjunction with the models like Mythos, I think is ultimately going to be what's going to solve these problems. It's not going to be our stuff being displaced because we know how to communicate with the network in a way that is very unique.

Maybe just following up, as much as you don't see that concern. How much does it help you on the operational side? Do you operate the business at a much lower OpEx intensity given the help from AI?

I would say that in certain areas, we're seeing some benefit. But the good news for us is we're able to reallocate that funding in the silicon and things of that nature so that was the restructuring we talked about was I made a point to say this is not AI replacing people's jobs, right? We're not -- I mean at broad scale at that level yet. But what we do see is it's a reallocation to these areas that we need to grow. But internally, we're using AI a lot, we're using a whole lot in our customer service organization, much like every customer in the world is doing.

We're using it in our legal space. We have 27,000 daily users of our own proprietary AI model front end to the model, Circuit, and it automatically determines which model is most effective for the types of queries that we're getting asked. We're using it big in sales now. It's being used meaningfully. So I think what we're -- I would say we're at the phase where we're in our programming, obviously, our coders, I think that our software at the end -- I think G2 has said at the end of '27 you might see 75% of our code being written by AI and I think the next big topic we were talking about it on our earnings call is going to be tokenomics because the cost of all this -- and driving the productivity of your people up by using these tools, the token usage is just getting pretty crazy right now.

Yes. Okay. Let me try to get in 2 more questions before we need to wrap up. Quantum. How do you see quantum interplaying with AI. You've made -- Cisco's made progress on quantum, including quantum networking, but where do you see quantum intersecting AI?

Well, it definitely is going to. And I think it's just going to make AI that much more effective in some cases, that much more scary, right? So we began investing in 2020 in this space, which, again, is great that we started. So we built a prototype networking chip for quantum because when you have these quantum devices, there are going to be nodes. When you put them together, you're going to exponentially increase the power of these nodes and so the network is going to be even that much more important and the security is going to be deeply important.

So I think that when you combine AI with Quantum, the power of what you're going to be able to do is obviously going to be massive. So moving the data around at quantum speeds as well as providing the security is going to be something that we're going to continue to spend more time on so early -- take the different dates that you hear from everybody an average amount 20, 30 something, I don't know.

Last one for you. Asking you to make predictions here, if you had to make 3 predictions about how AI changes the broad economy and IT infrastructure in the next 5 years, what would those be?

I really do think that we had this term called cloud native. So you went from embracing the cloud to being cloud native. And I think being AI native is going to be necessary to be successful 5 years from now, I think that's a given. I do believe that the fusion of security and networking will happen, and it's going to happen over the 24 months probably because it has to. And then I think the other thing -- this is not necessarily IT related, but I think it is going to drive an incredible productivity boom. I really believe that in the world, but particularly in the United States, I think you're going to see productivity boom like we haven't seen and probably in our lifetimes too.

Okay. Great. Any closing remarks before we...

Just thanks for having me. It was great to be here. I appreciate giving us the opportunity.

Pleasure. Thank you.

Welcome to Cisco's Third Quarter and Fiscal Year 2026 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.

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 and LinkedIn. Following this call, we will also make the recorded webcast and slides available on our 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-over-year basis. Please note that our discussion today will include forward-looking statements, including our guidance for the fourth quarter and fiscal year 2026.

These statements are subject to risks and uncertainties detailed in our SEC filings, particularly our most recent 10-K 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 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. Q3 was a great quarter for Cisco with our momentum accelerating and revenue and earnings per share both growing double digits and coming in above the high end of our guidance ranges. We delivered record revenue of $15.8 billion in Q3, up 12% year-over-year. Product revenue was up 17%, once again driven by robust demand for our AI infrastructure and campus networking solutions.

Our record top line performance, combined with operating efficiencies and outstanding execution by our teams allowed us to deliver non-GAAP EPS growth of 10%, demonstrating the effectiveness of the initiatives we outlined last quarter to mitigate memory price increases across the market. We believe the trust our customers and partners place in us has never mattered more, and our technology is more relevant than ever in the AI era. As a result, we saw record high demand in Q3. Overall, total product orders grew 35% year-over-year. Excluding hyperscaler orders, which grew triple digits, product orders were up 19% year-over-year, demonstrating the continued broad-based demand we see for our technology globally.

Enterprise product orders were up 18% year-over-year in Q3 with strength across our entire networking portfolio. Public sector orders were up 27% year-over-year with double-digit growth across all geographies. Product orders from service provider and cloud customers accelerated in Q3, growing 105% year-over-year with 5 of the top hyperscalers each growing in triple digits. We also saw solid growth from telco customers in Q3 with orders up 9%. Telcos are investing in Cisco technology as they prepare their networks to handle the scale, speed and complexity of AI.

Now some color on demand from a product perspective. Networking product orders continue to accelerate, growing more than 50% in Q3, driven by triple-digit growth in service provider routing and compute and double-digit growth in data center switching, campus switching, wireless, enterprise routing and industrial IoT products. This marks the seventh consecutive quarter of double-digit growth for our networking portfolio overall. AI infrastructure orders taken from hyperscalers totaled $1.9 billion in Q3 compared to $600 million in the year prior, with strong growth across our Silicon One systems and market-leading Acacia Optics.

The year-to-date total of $5.3 billion in orders taken from hyperscalers already exceeds our prior expectations of $5 billion for FY '26 with a full quarter remaining. Given the strong demand, we now expect to take AI infrastructure orders of approximately $9 billion from hyperscalers in FY '26. 4.5x our FY '25 total. We expect to recognize approximately $4 billion in AI infrastructure revenue from hyperscalers in fiscal year '26. Our Acacia business had its strongest quarter to date with more than $1 billion in orders in Q3 and is on track to grow over 200% year-over-year in fiscal year '26. Acacia is leading the coherent pluggable optics market, and we saw strong momentum across this business.

To date, we have shipped over 750,000 400-gig and over 40,000 800-gig coherent pluggable optics, which we believe far exceeds the next largest supplier shipments for both speeds. We had 5 new design wins with hyperscalers in Q3, 2 for optics, each with different hyperscalers and 3 for systems, including the first 2 wins for our Silicon One P200-powered system for major scale across use cases and a Silicon One G200 powered system for a scale-out use case. Separately, we took approximately $300 million in AI infrastructure orders from Neocloud, Sovereign and Enterprise customers in Q3.

We have seen triple-digit year-over-year order growth in each quarter of fiscal year '26 with approximately $900 million in orders taken year-to-date, and we have a growing pipeline of approximately $3 billion for our high-performance AI infrastructure portfolio across these customers. Enterprise data center switching orders grew more than 40% year-over-year and have now grown double digits 7 of the past 9 quarters. We believe the AI infrastructure opportunity in enterprise is continuing to ramp as Nexus switch orders tagged for AI deployments were up almost 50% sequentially in Q3.

Within campus networking, we had record orders in Q3, growing more than 25% year-over-year. We are seeing exceptionally strong demand for our next-generation switching, routing and wireless portfolio, which continues to ramp faster than prior product launches. We reported our highest ever wireless orders this quarter, growing more than 40% year-over-year. Customers are upgrading to modern WiFi, evidenced by strong double-digit sequential growth in orders for WiFi 7, making up half of the wireless mix in Q3. Research conducted recently with around 3,500 technology leaders across global enterprises confirms increased urgency to modernize campus and branch networks.

With traffic across these networks expected to increase 3x over the next 3 years because of AI, 93% of respondents are accelerating their network modernization plans. These findings support our belief that we are still at the start of a multiyear, multibillion-dollar campus refresh opportunity. The strong demand we see for our technology is driven by our ability to deliver AI native capabilities across our products, including weaving security into the fabric of the network and modernizing the operational stack of campus networks. Many of the world's leading companies are investing in Cisco's secure networking solutions for the high-performance connectivity, automated management and robust security they need to scale their AI initiatives.

Our Cisco Unified Edge solution is also gaining traction, and we've already booked a single enterprise deal for over 1,200 units. Unified Edge brings together compute, networking, security, storage and software to run AI applications at the edge where data is generated and decisions are made. Our industrial IoT portfolio also reported its strongest quarter ever in Q3 and has now grown in double digits for 8 consecutive quarters. We expect this demand to continue with the onshoring of manufacturing to the United States and as agentic and physical AI are expected to drive massive increases in network traffic.

Now shifting to security. In Q3, our core security portfolio, excluding Splunk, saw double-digit order growth across new and refreshed products with strong double-digit order growth year-over-year in firewalls. Additionally, over 1,000 new customers purchased our new products, including Secure Access, XDR, Hypershield and AI Defense in Q3, bringing the total of net new customers to approximately 5,000 since launch. The decline in our prior generation portfolio continues to offset the growth in our new and refreshed portfolio, but to a lesser extent than in the first half of the year. Turning to Splunk. As expected, we continue to see an acceleration in the shift to cloud subscriptions and away from on-premise deals, creating a near-term drag on revenue growth as we previously outlined.

We expect the mix of cloud business to continue to grow in Q4, while we are on track to exceed our target of 1,000 new customer logos for Splunk in fiscal year '26. AI is accelerating the pace of innovation for security defenders and adversaries, and we are innovating with speed and scale to help create an asymmetrical advantage for defenders. In March, we announced a major expansion of our Secure AI factory with NVIDIA, giving customers a framework for deploying AI across their entire infrastructure from data centers to local sites, eliminating the need to stitch together disconnected systems and embedding security from the start. We have also introduced several new security innovations designed to protect the entire AI life cycle.

DefenseClaw is an open source solution that helps customers safely deploy agents using common frameworks such as OpenClaw by enforcing guardrails and protecting against malicious behavior and attacks. To deliver an integrated Zero Trust solution for the agentic workforce, we introduced Zero Trust Access for AI agents and recently announced our intent to acquire Galileo and Astrix to expand our security and observability platform to include agentic identity, access management and behavior monitoring. We also announced new capabilities for the agentic SOC and observability for AI to help detect and respond to new emerging threats at machine speed and scale. We are working collaboratively across the industry to help defend against AI-enabled threats and shape next-generation security capabilities.

Cisco is a founding member of Project Glasswing and is participating in private testing of Anthropic's Claude Mythos preview model, specifically designed for proactive cybersecurity defense testing. We are also part of OpenAI's Trusted Access for Cyber program. Building on these initiatives, we announced earlier this week that Cisco is open sourcing the Foundry Security Spec, a production-grade blueprint for building scalable agentic security evaluation systems using both available and new AI models. We are providing this blueprint to customers to accelerate their ability to take advantage of agentic AI and stay ahead of adversaries. Turning to our innovation and other areas. Cisco IQ, our unified AI-powered delivery engine for Cisco services, is now generally available with more than 250 customers already onboarded.

Cisco IQ provides customers with a real-time benchmark view of Cisco assets and configurations in their environment, helping to future-proof it against emerging architectural threats. We also continue to accelerate AI advancements internally for our teams. Circuit, our proprietary AI assistant, is now fully embedded in how Cisco operates with near universal adoption across our employee base and over 8 million total quarterly interactions. Circuit leverages a network of advanced third-party AI models, automatically choosing the best engine for every task or letting users make that choice. As a founding design partner with OpenAI on Codex, our engineers have been using it from the beginning. And as of this week, we have made Codex available to our entire product organization to enable them to build tools and reimagine new products at unprecedented speed.

Finally, we are also proud of our incredible progress in quantum networking. We recently introduced a working research prototype of the Cisco Universal Quantum Switch designed to route and preserve quantum information between systems at room temperature and over standard telecom fiber. By building this infrastructure now, we are helping to accelerate the entire quantum ecosystem that will power the data centers of the future. To ensure we are capturing the significant opportunities in silicon, optics, security and AI, we announced a restructuring plan today to reallocate resources and allow us to invest in these key growth areas. These actions are building from a position of strength and focusing on the technologies that will accelerate our growth, deliver unmatched innovation to customers and partners and define our future.

To summarize, our innovation pipeline is accelerating and our latest offerings across the portfolio are seeing some of the fastest adoption in our history. This is translating to broad-based record high demand for our technology, which has never been more relevant to customers than it is in the AI era. This combination as well as the outstanding execution by our teams is driving record results and delivering value to our shareholders.

Now I'll turn it over to Mark for more detail on the quarter and our outlook.

Thanks, Chuck. I'm pleased to report we delivered another strong quarter in Q3, with both revenue and earnings per share coming in above the high end of our guidance. Total revenue for the quarter was a record at $15.8 billion, up 12% year-over-year. Non-GAAP net income was $4.2 billion and non-GAAP earnings per share was $1.06, both up 10%. Looking at our Q3 revenue in more detail. Total product revenue was $12.1 billion, up 17% and services revenue was $3.7 billion, down 1% year-over-year, mainly driven by the timing of service contract start dates.

Product revenue growth was led by networking with growth accelerating to 25% year-over-year, driven by AI infrastructure and campus refresh. We saw growth across the portfolio, led by double-digit growth in campus switching, data center switching, wireless and service provider routing. Security was flat, reflecting similar dynamics discussed in the last few quarters with growth in new and refreshed products continuing to be offset by declines in prior generation products and the transition in our Splunk business from on-premise deals to cloud subscriptions. Collaboration was down 1% with declines in Webex, partially offset by growth in devices.

Looking at our recurring metrics. Total RPO was $43.5 billion, up 4%. Product RPO grew 6%. Total ARR ended the quarter at $31.2 billion, an increase of 2%, with product ARR growth of 4%. Total subscription revenue was $7.8 billion and represented 49% of Cisco's total revenue. Total software revenue was $5.7 billion, up 1%. Q3 product orders were up 35% year-over-year, and the strength was broad-based. All geographic segments saw double-digit and accelerating product order growth, with Americas up 35%, EMEA up 39% and APJC up 25%. In terms of customer markets, the growth was led by triple-digit growth in Service Provider and Cloud. We also saw strength in public sector and enterprise, which were up 27% and 18%, respectively.

Total non-GAAP gross margin came in at 66%, down 260 basis points year-over-year. Non-GAAP product gross margin was 64.3%, down 330 basis points, primarily driven by negative impacts from mix and higher memory costs, partially offset by productivity improvements. Non-GAAP services gross margin was 71.6%, up 30 basis points. We continue our focus on enhancing profitability and driving financial discipline with non-GAAP operating margin at 34.2%, reflecting strong execution and operational efficiency. Our non-GAAP tax rate was 19% for the quarter. Shifting to the balance sheet. We ended Q3 with total cash, cash equivalents and investments of $16.6 billion. Operating cash flow was $3.8 billion, down 7% due to continued investments to meet growing demand, especially from AI infrastructure.

From a capital allocation perspective, we returned $2.9 billion to our shareholders during the quarter, comprised of $1.7 billion for our quarterly cash dividend and $1.3 billion of share repurchases bringing the year-to-date total to over $9 billion. There is $9.6 billion remaining under our share repurchase program. To summarize, we had another quarter of strong top and bottom line growth exceeding our expectations, driven by strong order growth and robust operating margin and demonstrating the power of our innovation engine. We remain focused on making strategic investments in innovation to capitalize on the significant growth opportunities that we see ahead. These investments will continue to be underpinned by our commitment to disciplined spend management. It is this powerful combination that continues to fuel strong cash flow and our ability to return significant value to our shareholders.

Further, as Chuck mentioned, we are realigning our resources to better capture the opportunities around silicon, optics, security and AI. As part of our announced restructuring plan, we expect to recognize up to $1 billion of pretax charges with $450 million to be recognized in the Q4 FY '26 and the remainder during FY '27. Turning to guidance. Please note, our Q4 and fiscal year FY '26 guide assumes current tariffs and exemptions remain in place through the end of our fiscal 2026. Looking ahead, you can expect us to continue our focus on durable growth with financial discipline driving operating leverage and continued capital returns. For fiscal Q4, our guidance is as follows: we expect revenue to be in the range of $16.7 billion to $16.9 billion.

We anticipate non-GAAP gross margin to be in the range of 65.5% to 66.5%. Non-GAAP operating margin is expected to be in the range of 34% to 35%. Non-GAAP earnings per share is expected to be in the range from $1.16 to $1.18. We are assuming a non-GAAP effective tax rate of approximately 19%. Cisco is positioned for its strongest year ever as indicated in our guidance for fiscal year '26, which is as follows: we expect revenue to be in the range of $62.8 billion to $63 billion. Non-GAAP earnings per share is expected to range from $4.27 to $4.29.

Sami, let's now move into the Q&A.

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

Amit Daryanani with Evercore ISI.

Congrats on a nice set of numbers here. I guess, Chuck, maybe just to start with the first question was, if I think about the back half guide, specifically the July quarter guide, it really implies that revenue growth is accelerating into the low teens, which is a nice bump up from the longer-term framework you guys have historically had. Can you just talk about the durability of this double-digit growth? Are you starting to see enterprises starting to upgrade their networking architecture and that's really what's helping it? Or is this a pull forward?

I'd love to just understand the durability of what you see in the back half. And maybe I'll ask my follow-up as well. It's really on Silicon One. I think you folks -- you mentioned about a P200 design win to scale across. That's the first one you folks have talked about. Can you just spend some time on when customers choose Silicon One versus other offerings or merchant offerings that are out there, what is the value proposition that Cisco is providing that's so attractive to them? And how big and how far can it scale from a market perspective for you folks?

Thank you, Amit. I'm going to let Mark start on the durability of the growth question, and I'll comment and then I'll take the Silicon One P200 question.

Yes, sure. So thanks, Amit. So I think that, obviously, we're seeing a lot of tailwinds and very pleased with the growth that we're seeing. Q4, as you mentioned, 14.5% top line growth and even higher than that on the bottom line. So really good signs. I think as you look to next year, we'll look to talk in more details and specifics as we close out FY '26, and we'll give you a more firm guide. But in terms of the durability, I think there's a couple of things to be thinking about that might help you as you look at FY '27.

I think the first thing is just it's probably -- so just kind of separating the AI hyperscale business from the sort of rest of the portfolio, if you will. I think on the AI hyperscale side, it's probably reasonable to expect that we would recognize at least $6 billion of revenue in FY '27. Again, we'll have a more formal guide for you in 90 days. The rest of the portfolio, I think it's reasonable to assume it grows in line with our long-term model. And remember, the long-term model that we gave you initially, that included all the AI hyperscale opportunity as well. And so I think the balance of the portfolio could grow and it's reasonable to assume it will grow in line with that guide.

Thanks, Mark. Hang on, I need to answer the second question. So on the Silicon One, the P200 wins in particular, so let me just clarify a little bit about this. So during Q3, we were awarded by two different hyperscalers P200 design wins, which is our product -- our silicon that goes into our product that is used for scale across applications. So these were our first scale across wins. Just in addition to that, in the first week or two of this quarter, we won a third hyperscaler's P200 design win for scale across as well.

So we're really excited about the uptake there and really pleased with the work the teams are doing on the silicon front. I'd say if you look at the Silicon One, the reason we're winning is because of Silicon One. I've said repeatedly on these calls over the last couple of years that as we move to the future, that if you don't have silicon, you're going to struggle to be relevant to the hyperscalers. And I think that's what we're seeing. And so when you look at the number we put up and the percentage of that, roughly half is systems, which is Silicon One, it's a massive differentiator for us. It also -- we'll talk about further on in the Q&A session, I'm sure, but it also gives us a lot more control over the supply chain and allows us to be a little more confident in our ability to deliver to our customers. So we're really pleased with where we are.

Tal Liani with Bank of America.

Welcome back to 1999. It's great to see the stock going up and orders 35% up. That's great. But I do have a question about orders, and I'm looking at it the other way. Non-AI orders grew 19%. That's excluding hyperscalers. Now the non-AI, the environment is not that better this quarter versus last quarter. And I'm wondering what drives it? And are you concerned that enterprises -- non-AI customers are buying ahead of time because of supply constraints, because of difficulties to get products on time. Just a question about the sustainability of this kind of growth.

Thanks, Tal. So what do we see happening right now that we think is contributing to the acceleration? So first and foremost, we see continued expansion of a focus on AI in the enterprise. We see customers now preparing for inferencing and agentic applications. And in those cases, the network is incredibly important and moving the bits around with low latency is super important and customers are realizing that they have to modernize. That's why we saw our enterprise data center switching business up over 40% in orders for the quarter. And that's just pure enterprise build-out. So we see that accelerating.

Second is leading through this is the modernization, but also we believe customers are preparing for increased levels of cybersecurity threats. We'll talk a little bit about Mythos in a bit. But I think there are some customers that are starting to think through the implications and what it is they need to do to be prepared for that. And obviously, we continue to see the design wins in the hyperscale space and continued adoption of our both silicon-based products as well as our optics. So that's sort of how we see things happening. And Mark is going to talk a little bit about some of the numbers. I also don't think you'll see that our lead times on the traditional networking side, Mark, keep me honest, but they're not extreme right now. So do you want to talk a little bit about the numbers, Mark?

Yes. Thanks, Tal. So I think that what we've gotten a lot of questions on and certainly the write-ups leading into earnings were around pull ahead or pull forwards. And first off, let me just say that I think that it's reasonable to assume that there is some level of pull ahead into Q3. I do think it's very difficult to speculate exactly how much, but we believe it was a very modest amount that was in Q3. And I'll give you 3 data points as to why we think that. First of all, and you cited this, in terms of the underlying ex webscale growth rate, our Q2 order growth rate was at 10%.

And then our Q3 order growth rate, again, for ex webscale was at 19%. So you saw about 9 points of acceleration. And if we do the math just on the price increases actually that we put into place, that actually accounts for about half of that acceleration, about 4 to 5 points worth of additional growth that you'd see, same units, but at higher prices. The second data point I'd give you is just we always look at pipeline pull forwards, so of future quarters. And of course, we always do some of that. If you look at the Q4 pipeline that we pulled forward into Q3 and closed, we actually did not notice really any difference or any incremental pipeline that was pulled forward from Q3 -- sorry, from Q4 into Q3 than if you looked at the same time period a year ago.

And the third data point I'd just give you is really around the Q4 pipeline itself. So the pipeline is very healthy, very good year-over-year growth. And what happened was if you look at week 1 through week 13 of Q3, so we're talking about the Q4 pipeline, though, we saw no degradation to that Q4 pipeline from the beginning of Q3 all the way to the end. And in fact, it actually grew as we went through the quarter. So all told, again, I think it's hard to speculate exactly how much. It's reasonable to assume there's some, but we think it's a modest amount.

Ben Reitzes with Melius Research.

I kind of make it a rule to only congratulate management teams when they're making people money, and it's worthy of congratulations here. So thanks for the question. I wanted to talk about the comment Mark made around the non-AI portion growing in line with the model next year, 2% to 5%, I believe, is what you said at your Analyst Day. Maybe I got the wrong number, maybe I'm too low. But I would think that on the non-AI portion, the price increases would -- even though you have a tough comp by the 3Q, the price increases would pretty much get you above that. And so I just wanted you guys to dissect that a little bit more if the non-AI when you talk about the long-term model is indeed 2% to 5% and don't the price increases get you above that given everything we're seeing and these strong trends.

Ben, it's Mark. So I think that in terms of the long-term model, it was actually 4% to 6% in totality. So the 2% to 5%, I think, was on the networking side alone. We had a much higher growth rate actually on security and observability, for instance. And so what we're really just saying is, first off, we'll give you a much more detailed and specific guide as we get through FY '26. So in 90 days, we'll really talk more specifically about it. But I was just saying that, that 4% to 6%, that absent AI hyperscale opportunity that you could expect for us to grow in line with that. And again, as you mentioned, we will have some tougher comps as we go into next year. The price increases should help us as well, and we'll talk more in a quarter from now.

Aaron Rakers with Wells Fargo.

I'll ask them both at the same time. I guess the first question is going back on the supply chain. One of your competitors recently alluded to just things getting even tighter and even threw out the comment of possible decommits. So I'm curious if you could give an overview of like your assessment of what's going on in the overall supply chain, maybe beyond just memory as far as what you're doing to get allocation of wafers for Silicon One or anything that you can share on that front?

And then I guess my quick follow-up is that you've got a very significant increase implied in your AI order intake into fiscal 4Q, up from $1.9 billion. I guess if my math is right, close to $3.7 billion. Just curious, what's driving that? Is that the scale across wins? Are you starting to maybe see scale up build in your pipeline? I'm just curious if you can unpack that pretty notable jump into this next quarter.

Yes, I'll make a quick comment, and then Mark, you can talk about supply chain stuff that we've done. So I just want to remind you, this is one of the big advantages of Silicon One. It's one of the big advantages. We control so much more of our supply chain, and we don't have the number of dependencies that others may have. But Mark, do you want to go through some of the -- I think you should talk a little bit about some of the actions we've taken too and then how we're feeling and the fact that we haven't really seen any decommits at all. Do you want to go through that...

That's right. Happy to, Chuck. So yes, I think that, as Chuck was saying, I think the fact that we design our own silicon really gives us greater control end to end. I mean the fact that we're directly managing wafers, substrates, assembly and test really gives us much more control over the supply chain, if you will. In terms of silicon, we've secured our supply through the calendar year '26 for the next 8 months anyway. And then normal negotiations are active and underway on calendar '27. I think if you look at memory, there's been a number of initiatives. There's 20-plus programs that we put into place that are active to reduce the memory utilization across the portfolio, an example of which is in the wireless space, you'll see products that will become orderable in Q4 that will actually require 50% less memory. And so that's a big positive.

I think that the other thing is we're investing in new capacity. You've probably seen the announcement that we made on our strategic investment in -- in a 3-year supply agreement with them as well. That's going to really help us. The fact that we are also moving a number of different -- in a number of different places from DDR4 to DDR5 and those conversion projects that are underway also a really good thing. Overall, inventory and advanced purchase commitments, we're really able to lean in there given our financial strength. So those in totality, $6.7 billion increase just in the last 90 days, so up 48%. When you look at it year-over-year, again, inventory and advanced purchase commitments are up $11.6 billion year-over-year.

So I think overall, whether it's across silicon, substrates, memory, photonics, PCBs, power, we're securing long-term agreements where it's possible. We're working with our sub-tier suppliers, and we're building strategic inventory. So a big differentiator there. And I just want to reiterate what Chuck said, we did not see any decommits in the quarter.

Yes. And then on your second question about what's driving the AI orders -- the significant AI orders. I mean most of what we'll see in Q4. First of all, I just want to remind you, we've said that this business is nonlinear. And if you look at the chart that we put in with the prepared remarks, it really does indicate that Q3 was 1.9, a little lower than Q2, but then Q4 accelerates. So there's a lot of timing dependencies here that suggest remember that this is nonlinear as we go to the future. I mean these are Silicon One wins. Half of the wins were in optics. Our optics business really accelerated. The Acacia business is on fire. We had -- it's a lot of scale out, primarily scale out. We just got the word on the scale across.

So there's actually no scale across in the numbers yet. We would expect of those 5 design wins that we talked about, we'll begin to see some early orders in Q4 and -- but not at scale until we move into fiscal year '27. So I think it's a byproduct of just a lot of great relationship work that the teams have been doing over the years. They love our silicon. They love the supply, and they love our optics. And it's -- that's really it. So we just intend on continuing to work really hard and deliver what they need.

Meta Marshall with Morgan Stanley.

Maybe building on that last question. Just between what you're laying out for fiscal '26 and fiscal '27 AI revenue, the AI orders certainly don't have the longest duration, but just wanted to get a sense of what kind of duration increase you're seeing in those orders, just given concerns around supply chain that may not be as applicable to you, but kind of definitely apply along the chain. And then just on a second question, just any way to kind of split the gross margin headwind on product just between memory and product mix?

Do you want to take those, Mark?

Yes. Thanks, Meta. So I think just first, just to hit it right up front. I think in terms of duration, we're not really seeing anything. We've always said these orders are nonlinear and they plan well in advance and really nothing new there. On the gross margin side, I think the teams have done a fantastic job there. We saw gross margins in Q3 at 66%, which is right where we expected, right where we planned for and right at the midpoint of our guide. And we do believe that gross margins have stabilized. So if you look at that, it's reflected in our Q4 guide as well with the midpoint, again, right at 66%. As I mentioned, a few things in terms of the 20-plus programs that we have going on around memory utilization.

The teams are doing a great job there. The DDR4 to DDR5 conversion. Also, there's a number of things that we talked about last quarter that we've also put into place, raising prices, obviously, that you mentioned, but also the adjusting terms and conditions and then really leaning in and leveraging our financial strength on the advanced purchase commitments. And you saw those go up about $6 billion in just the last 90 days. I might just also just mention that beyond gross margin, we're focused on driving operating leverage. And we're growing bottom line faster than the top line. You see that in the Q4 guide. You also see it in the full year for FY '26 and what we guided as well. And a key path for operating leverage is a keen focus on the operating margins themselves. We saw record operating margin dollars in Q3.

We're focused on delivering 34% operating -- or op inc as a percentage of revenue. And again, you've seen that every quarter in FY '26. You see it for the full year as well. And we're able to make some trade-offs. So longer term, if we do see some pressure on gross margin, I think that there's a number of things that we can do. I'll just give you an example that we saw in Q3, while we had gross margins declining 2.6%, if you look at OpEx actually, it also declined more than 2% as a percentage of revenue. A year ago, it was 34.1%, and it was 31.9% this quarter. So I think there's going to be businesses we get into that have different scale. And so there's a lot we can do to protect that 34% op inc.

David Vogt with UBS.

I'll give my 2 at the same time. So Chuck, you talked briefly about the security and the software portfolio. I know it's been kind of a thorn in the side of the company. But can you speak to kind of how you're thinking about that business as it kind of improves going forward relative to sort of the old portfolio versus the new? And sort of how do we think about the impact of the Splunk model transition as we go into fiscal '27 as customers continuously move from license to subscription? I know you've given sort of a range in terms of where you think that portfolio could end up from an ARR growth rate perspective next year, but I just would love an update on that point.

And then I'll give you my second question around margins. So I think I heard you guys say margins are kind of stable, which makes a lot of sense. How much of that margin dynamic is largely driven by the mix to hardware? I know you didn't give specifics -- but obviously, if we expect $6 billion of AI revenue next year, up from $4 billion, like what are the offsets that you're thinking about to help mitigate sort of that product mix versus effectively software security mix, if that's going to grow 50% next year from a baseline of $4 billion this year?

Thanks, David. So on the security front, so we actually saw some pretty good improvement during the quarter. So the new and refreshed stuff continued to grow in double digits. We saw, obviously, the legacy stuff is still a drag, but it wasn't nearly the drag as it was in the first half of the year. And -- but what we really have seen in the last few quarters, in particular, is strength in our firewall business. And last quarter, we saw very strong double-digit order growth in firewalls. So I think last call, I said we would exit this fiscal year approaching double-digit revenue growth on the traditional -- on the organic Cisco security portfolio.

And I think we're heading in that direction, and I feel good about us actually making that happen. I think we'll continue to just quarter after quarter, we're going to see slow, steady improvement there. And so I'm actually -- the firewall results are really giving me a lot of optimism right now. We got a several quarter run of big win rates, and we're feeling good about that. So -- and then on Splunk FY '27, I think it's going to be highly contingent upon what happens with this cloud versus on-prem mix?

Does it continue to -- do we see a continued shift? I think we saw another 2 or 3 points during the quarter, in Q3, from where it was in Q2. And if it stabilizes, then we'll lap the compares, obviously. And then next year, it shouldn't be quite the drag. But we'll just have to see how that mix evolves. Mark, any comments on that? And if not, you can take the margin question.

Yes. No, I think you hit it on the Splunk transition. In terms of gross margins, the 2 biggest factors there, David, are certainly mix and memory. The bigger factor actually is mix, certainly. As you look at the growth of the business, you've got hardware really accelerating, which we're very pleased with, approximately 30% growth where you've got software at 1%. So it tells you that our hardware margins are actually really good. And it also tells you that the supply chain team that we have is world-class.

I think that the productivity improvements that they continue to show are substantial. I've gone through a few of those already on this call. But also as you get more scale and revenue continues to grow at a sizable pace, there's some benefit that goes to the gross margin line as well. And that's been a key factor in us being able to really stabilize gross margins.

Samik Chatterjee with JPMorgan.

Congrats on the results. Chuck, maybe to start off, earlier in the call, you did mention sort of being part of Project Glasswing and sort of wanted to get your thoughts around what you're seeing in terms of implications on your business from Mythos? And how do we think about sort of implications to your security business overall in the long run? When do we start to see maybe certain sort of drivers to your security business from that front?

And then, Mark, for you, with the restructuring that you're announcing today, should we think about the operating leverage in the business to be marginally better next year compared to what we saw this year? How should we think about sort of how much of those savings get reinvested in the business and how to think about operating leverage next year?

Thanks, Samik, and I appreciate the kind words. On Glasswing, yes, I think the implications -- so first and foremost, we're using it meaningfully to test our own code. And I think you're just going to see us accelerate patches and things of that nature out to our customers. So that's all positive. From a business implication perspective, which I think is the crux of your question, I think there will clearly be security implications for us, and I think it could -- there could be opportunities for us for sure. I think the -- as we talk to customers today, and I've talked to so many of them over the last few weeks since this has become public, there's a lot of concern, obviously, about unpatched technology in their infrastructure, not just ours.

And there's a particular focus on last day of support equipment or equipment that's past the last day of support and that technology that can't be patched. So I actually think while there will be a security opportunity, there's going to most likely be a lot of focus from our customers on modernizing their infrastructure so that they don't have this risk from technology that just can't be patched because it's well past last day of support. So that's how I'd think about it. And I would tell you that in Q3, I would effectively say there's really no Mythos-driven orders. There may have been 1 or 2 from a customer who decided to do it, and they were already planning on it, Mythos pushed them over the edge, but I don't think we had any meaningful orders in Q3 as a result of Mythos, but that could change in the future as we continue to work with customers.

Yes. Thanks, Samik. And just with regard to the restructuring, this was really not a savings-driven restructure. It's really -- things are moving incredibly fast right now. And this is more realigning from an already strong base as you're seeing in our financials, but really realigning resources around silicon, optics, security and AI. And so being able to move fast, we don't always have the exact resources that we need going forward in the right places. And so that's really what this is about versus savings.

Karl Ackerman with BNP Paribas.

This is Sam Feldman on for Karl Ackerman. First question, can you comment on why the fiscal '26 AI orders were so conservative? I know you mentioned nonlinearity in customer orders, but is there also a function of market being larger than you anticipated? Any color would be greatly appreciated.

Yes. Thanks, Sam. I would say that I think we've had just probably more design wins and more success than we expected at the beginning of the year is one thing. But the other thing is that sometimes these customers they make decisions. And when they decide to go, sometimes you don't know about it 3 months ahead. You find out about it and they're like, we're ready to move.

And so the more they use our products, the more comfortable they become with them, the more comfortable they are with our road map. So I think it's just led them to have more confidence in continuing to invest with us. I don't think it's anything more than that. But it's really that -- in some cases, these massive opportunities will arise and you won't know about them and then all of a sudden, you have a big number in the pipeline 30 days later. So hopefully, it continues, but that's sort of what I would attribute it to.

Ben Bollin with Cleveland Research.

Chuck, I was hoping you could elaborate a little bit about this internal inference effort you guys have with Circuit. Could you talk a little bit about what that's solving for top line, OpEx efficiency? Just what you're seeing from that? And then also, I'm curious where you think big enterprises with their own efforts around other activities in the category.

Yes. A lot of companies have done exactly what we're doing by creating Circuit as a front end to these models. It allows us to put Cisco-based guardrails in place for what -- how we want these models to be used in addition to the guardrails that they provide. And then it allows us to combine both public model information with proprietary Cisco information and give our teams the ability to leverage AI on both public Internet data as well as our own proprietary data. So it's -- as an example, a sales rep can go in and leverage it and have the Circuit actually build a sales presentation on our products based on internal information about our products.

And -- so that's a simple example of how it could work in addition to having APIs out to the different models. And the individual can choose the model they want to use or they can -- or we will default to what we believe to be the best model. But we're also working on delivering independent agents for every employee in the company so that they can have agents that are working on their behalf. There's a lot of work that our teams are doing. I'm really pleased with where we are. And was there a second -- there was a second, was it?

Just how other companies...

Yes. And I think other companies are doing the same. I would say on the inferencing front, I think you see customers actually doing exactly that. They're trying to build up their own infrastructure to support a combination of inferencing applications leading to agentic applications that they're using a combination of APIs into public models as well as information in their proprietary data sources using different protocols that are available today. So MCP connectivity, et cetera. So I think it's -- and I think that's part of what's driving the increase in our private data center business is customers just preparing for this.

Michael Ng with Goldman Sachs.

Mine, just on pricing. In response to an earlier question, I think you said there was 4 to 5 percentage points of benefit on ex web scale order acceleration from pricing. I was just wondering if you could talk a little bit about the pricing strategy this year across what products that you guys implemented? And anything that you guys are doing around changing your approach to leaving offers open? Like are you repricing POs? Just anything that you're seeing around price elasticity as well, that would be helpful.

Yes, sure. Michael, so yes, a couple of things. I think -- in terms of -- I'll just hit the last piece first, actually. In terms of the terms and conditions that we really shored up, we had about 30 days that we would give notice. We would announce a price increase, but then it didn't take effect for 30 days. And then you had between 30 and sometimes 45 days to still honor quotes that were at the previous price. And so you ended up having a couple of months plus there of exposure. And as you know, the market is moving much faster than that. And we're just in unprecedented times relative to memory pricing.

So really, what we did was we just tightened that up, and we said, we'll give you 15 days notice. and then another 15 days on the back end of that to honor quotes. So basically cut the time in half or maybe even a little bit better. And that's really helped us. You're right on the amount of price increase impact that we had in the quarter for Q3. So if you look at that non-web scale business, again, it grew at a 19% clip in Q3, a 10% clip in the prior quarter. If we just -- what we did was we just ran basically those SKUs in Q3 and essentially 5 -- about 4 to 5 points worth of acceleration was just purely based on price, not incremental units, but just price. And so that's spot on there.

And then how we've dealt with the price increase, I think we haven't put anything really on software at all. So it only applies to the hardware side of the business. And then we've tried to be very thoughtful on the hardware side to just say, where are we most competitive? Where is the memory utilization the highest and try to really apply it with some strong logic there.

George Notter with Wolfe Research.

I was just curious about the pricing impact. You mentioned 4 to 5 points in this past quarter. As you look forward, is it fair that in the July quarter, you'll get a more significant impact from pricing being fully baked into the full quarter? Is that a dynamic here that is part of your guidance?

Yes. George, so I think that as you look forward, there's a little bit of a difference between orders and revenue. So on the order side, I think that, that is a fair assumption that you would see a higher impact from price increases as the price increases are now sort of fully absorbed, if you will, as we get into Q4. On the revenue side, you really didn't see any impact in Q3 per se that was due to the price increases just based on timing of when you take the order and when it goes into the build plan, et cetera.

You'll start to see some of that benefit in Q4, which is good because that's really -- those are the actions that are helping us stabilize gross margins. So the impact of higher memory prices is actually much more acute in Q4, but you also have the price increases helping us in terms of what we'll ship out in Q4, and that's really been a big part of what's helped us stabilize gross margins.

I'm going to hand it over to Chuck for some closing remarks.

First of all, thanks to all of you for joining our call today, and I want to thank our teams. I'm very proud of what we've been able to achieve, the great results, really driven by the relevance of our technology and our role as what we believe to be a critical infrastructure player for this AI era. We've made incredible progress with hyperscalers based on Silicon One and Optics positioning us so well.

We continue to be incredibly relevant in the enterprise and see this AI build-out and modernization continuing. And as AI continues to highlight the importance of security posture, I think it underscores the criticality of fusing security into the fabric of the network, and we're uniquely positioned to do that. So I'm very confident about what's ahead. Big thanks to our teams again, and thanks to everyone who joined us today. Sami, back to you.

Thank you, Chuck. As a reminder, Cisco will be welcoming thousands of Cisco customers and stakeholders to its annual user conference, Cisco Live in Las Vegas from May 31 through June 4. The keynotes and other content will be live streamed and be available on demand, and we look forward to connecting with some of you there. Cisco's next quarterly call outlining our fourth quarter FY '26 results will be on Wednesday, August 12, 2026, at 1:30 p.m. Pacific Time, 4:30 p.m. 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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While we get situated, I'll read the disclosure off the top of my head. For any research disclosures, please see the Morgan Stanley website at researchdisclosures.com and/or reach out to your Morgan Stanley sales representative.

We are delighted today to have Cisco here with us. I'm Meta Marshall. I cover networking and cybersecurity here at Morgan Stanley. We're delighted to have the CFO, Mark Patterson; and Martin Lund, EVP of Hardware and Silicon One Systems. I think, Martin, this is one of your first more public appearances. So we're very happy to have you here.

Well, he's been public. It's hard to keep them off stage.

Yes, exactly. All right. Mark, maybe let's start with you. In fiscal Q2, you guys delivered revenue with product orders accelerating to 18% growth. You subsequently raised your full year guidance. Just what demand trends are you seeing? And maybe kind of contextualize that into the different end markets that Cisco serves?

Sure. Happy to. Yes, first off, I would just say, as you mentioned, 18% really strong demand is what we're seeing right now. And I'd say the other word that I'd use is very balanced. As you look at it, the 18%, if you exclude hyperscale, which we all know was a big number for the quarter, it would still have grown 10%, so double digits on a global basis, just ex hyperscale.

If you look at it by geography, you look at it by vertical, the geographies, all 3 geographies that we managed grew double digits, and all 3 of them showed accelerated growth in Q2 than what they showed in Q1. So really strong growth there. Verticals were really strong.

If you look at public sector, it grew double digits in all 3 of the geographies as well. Enterprise accelerated from Q1 to Q2 and SP and Cloud also, we're seeing significant acceleration.

The other thing that we talked a lot about on the call is 2 big, massive multibillion dollar opportunities that we're going after that are going quite well. One is on the AI infrastructure. side and the other is really this campus data center or campus refresh, rather. And both show really good strength. If you look at the AI side, we took $2.1 billion in new orders from hyperscalers. That's what we did. So in 90 days, we did the same as we did all of last year.

And so you're seeing from a lot of the work that Martin and his team are doing a really good momentum, really good relationship building, but also we're delivering the technology that they need, most importantly.

And then on the campus side, we saw really strong growth in campus overall. If you looked at the individual components and when you look at wireless routing, campus switching, all 3 of those areas, they're moving to the new platforms faster than prior generation launches. So we're very happy with what we're seeing in both those space.

Got it. Maybe just jumping into memory and gross margins that we can't say that for very long. Gross margins in fiscal Q2 saw a little bit of pressure. This was you mentioned mix shift towards hardware, but also just kind of rising memory prices. And just as you think about AI infrastructure ramping, memory continuing to get more expensive, can you just walk through the mitigation steps you guys are taking on gross margins and then just the trajectory of gross margins throughout the year?

Yes. We should take a moment on this one because as you can imagine, this isn't the first question.

Right. Not the first time you got the question.

On this topic. So there's really 2 big things that are at play here. So one is memory, and I'll talk about that here in a second. And then the other is mix in terms of what we're selling and the acceleration that we're seeing in different parts of the portfolio.

So the first, in terms of memory, what we're really doing is looking to control what we can control. So obviously, everybody has seen the sort of unprecedented pace at which memory prices are going up. So there's 3 things that we really wanted to outline that we're doing that we can control and looking at proactively. One is just updating our prices. And so you're going to actually see our latest price increase will go in effect on Monday. And so we're going to stay very close to that, in particular, on the compute side, more than anything, but also some of the higher memory products just across the portfolio.

The second thing is really, we've had some very generous Ts and Cs with partners and customers that allow a fairly lengthy time between when we announce a price increase to when it takes place. as well as, okay, now it's taking place. But if you put a quote out already, we'll honor that for another 30 days. Both of those areas were tightening substantially. And so I've had discussions with both partners and customers, and I think they all get it, right? They don't love it, but they understand this is a new way of doing business.

And then the third thing that we just talked about was we're really leaning into our financial position and strength in securing the supply that we need. So if you look at our advanced purchase commitments, just in the last 90 days, those are up $1.8 billion. And a lot of that is to meet the overall demand acceleration that we talked about, in particular hyperscale, but then also the memory supply that we need to.

On the mix side, so what I would tell you there is just we're seeing significant growth in our hardware business. It grew in excess of 20% in Q2. And our software business is a little bit softer right now, in particular with security. And so as you look at those 2 pieces, kind of how that impacts gross margins.

On the hardware side, I would just say we have very good margins actually in our hardware. They're just not quite as good as software, obviously. As you see -- just to give you kind of a data point on how significant of impact that it has. If we had grown security mid-single digits in terms of revenue in Q2 versus down 4%, which we posted, that would have been a point of gross margin right off the time.

And as you look at the hyperscale acceleration, they love our silicon and optics and they love the high-performance systems. They don't buy as much though of the software and the services. But it's not like for every incremental dollar of hyperscale revenue that we got to add incremental OpEx. So it's got a very different go-to market, very different ratio, if you will, in terms of our overall costs. And as that business really ramps, that will help our overall operating margin.

So net-net, just to say the last piece on this, I think -- it's important to note that we're going to be very focused on profitability and very focused on operating margin. The last couple of quarters, we've guided 23.5% -- sorry, 33.5% to 34.5%, in terms of our overall operating margin.

We also guided that for Q3. You're going to see that focus on despite the ups and downs you may see in gross margin -- you're going to see us very focused on the overall operating margin performance.

Q2 is a great example that despite the headwinds we saw in gross margins, we actually posted our highest operating margin in 4 quarters. And we're focused on EPS growth being faster than the top line growth. And you saw that in the first half of FY '26. You also see it in our guide for the full year of FY '26 as well.

Okay. We're going to jump in with Martin in a second around kind of everything happening with silicon and cloud. But Cisco has been on this journey over the last 5 to 10 years to have more software, more recurring revenue. Just how do you make sure that, that kind of software security recurring revenue story continues to build even in light of kind of some of the greater opportunities you're seeing on the AI side of the business right now.

Yes, it's still a very important part of our business. Even though we're seeing this massive acceleration in hardware, it was still a little over 50% of our business in terms of software and subscriptions in Q2. As I mentioned earlier, it's a big part of our overall profitability equation and mix as well. And so we're still seeing good growth in ARR and RPO.

We've got $43 billion of RPO on the books right now, and that's going to certainly help just drive the predictability and the durable growth that we're trying to drive over time.

Okay. I want to step into the kind of relationships you guys have had with the cloud and maybe a question for both of you guys. Just in terms of -- what are the steps that you guys took over the last 5 to 10 years to increase to really kind of restart your relationships with the hyperscalers in some ways? And then just how do you think that, that can continue to build over the next couple of years?

So I'll just -- I'll say a couple of words and then Martin can jump in. I have to say some of this because he won't actually complement himself. But I think there's 2 things that come to mind for me. One is we made some key acquisitions, I think certainly, Leaba was a big acquisition for us. Acacia was another big acquisition for us.

And then we just -- we brought in some of the very best talent in the industry. And that's certainly Martin. It's also a number of folks that Martin brought in on his team as well. And so I think starting with the very best talent was a big difference as well.

Yes. I think it also started to -- if you go back, there's a strategy shift that Cisco was treating the hyperscalers a little bit like a big enterprise, but they're different. They're very different. And that's -- and when buying Leaba investing into core technology, they also -- we changed the way we approach the customer and said, "Listen, you can -- we will meet you where you need us to be. " If you want us to buy a branded Cisco box with all our capabilities, and it's fine, we will do that.

You want us to build your white box with our own silicon in it, we will do that. You want just buy the silicon or the components and you will put the pieces together, then we will do that, too. So it's a complete change in posture. So that was sort of, I think, the pivotal point. Now you have to deliver. Now you can get eligible for doing business. Now you have to prove yourself.

And over the last, I would say, 5, 10 years, Cisco have proven themselves in every one of the hyperscalers in terms of we can deliver good technology. We are reliable. We actually know how to support you much better now because it's a different way. It's not like a 1-800 number, right? I like to say doing business at hyperscalers is a little bit like going to final exams every day, every day. It's just that you can't pass, but you can fail. You can mess up and then you're out every day.

And another way to think of it, I spent a little bit of time at other companies in the past, including Microsoft. And on the inside of that is you understand -- the stakes are so high, the scale is so big that there is no room for errors. And escalations are happening in nanoseconds or microseconds, not in hours. So that's the mindset that we have built up a culture around.

And then -- okay, so that's good. Now you have to be competitive, right? You have to build chips and systems and optics. And I'll give you -- for example, this is one of those chips.

Very expensive.

It's not functional when you touch, it is game over. But this is a 100-terabit chip. This is -- was announced just recently. We announced another version of that. I have a few of them in my pockets here. So just in case you can see. But what you may not know is that there are very, very few companies in the world that can actually design these solutions. Broadcom is one of them. This is a Tomahawk 6 equivalent called G300. This is a Jericho equivalent. It's actually double Jericho, but it's called P200.

And there's essentially 2 other companies that can do this in the world, Broadcom and NVIDIA. And now we're in a good company. And I think what we come at is a slightly different approach. We come under system -- with systems background with a networking background. And that sets us apart, I think, and it will do even more so over time.

I think when we're moving the AI revolution is a lot of data movement that is at the essence of it, which is networking. And we are moving into a token economics model where it's about uptime and dollars per token. And so that's kind of what we do pretty well. We've done that with hyperscalers in the old days, they're called telcos, right? That's uptimes 5, 9. It's about everything needs to be working.

And I think that sets us apart as a strategic supplier. And now that we show up, we know how to do business with them. We've proven that we're willing to be flexible and do business on their terms. And now we have road maps and technology. I think that's what I think is different.

Yes. Okay. I mean you just announced and showed us the G300 Silicon One chip. Maybe just how does that position you guys in the scale-out market? And how does the programmability of Silicon One kind of differentiate you guys in terms of total cost of ownership?

Yes. I think that's a very important part. First of all, you have to be time to market is definitely key in this space, and we are -- I think we're in the playing field alongside with others. But what -- but we're not just a me-too copycat of something else. We have a distinct and different approach to to networks silicon, and it's what we call the Silicon One architecture. So it's a unified architecture that allows us to do both switching and routing in the same architecture where others having different architectures that are distinct and different. And they kind of don't really actually play with each other. They have different software stack and behaviors, we have won.

And at the heart of that is a programmable engine that allows us to basically drop down microcode or it's called P4 into the chip that will decide -- help it determine its behavior or forwarding behavior. And we can do that after the chip is in the network. We don't have to spin a chip, a new requirement shows up. You don't have to go back and build a new chip to bring it up. We can write some software and meet it. And that becomes increasingly important as you're seeing I mean the networking for AI is changing so fast.

We're moving towards more of a heterogeneous compute architectures where you have different types of compute they need to -- they will have different behaviors. So we can meet those behaviors programmably, Others are hard coded and have very, very fixed capabilities. We have this programmability. And what it also allows us to do is to have the same silicon serve in different roles in the network. So even in a scale-out network, there are different -- many different roles, whether you're top of rack or whether your end of row or whether you're sitting in aggregation functions.

And what we can do is that we can give different personality to the same box, and that's over time, will give a lot of benefits. And I think play into this token economics architecture is like you want to have flexibility in your deployment models.

Yes. You mentioned you've kind of expanded the portfolio for the P200, for DCI or kind of scale across. Just how do you think of these distinct architectures work together to capture kind of the full AI opportunity? And you mentioned this is differentiated that you don't have these kind of 2 separate platforms. But kind of what is -- are you seeing the response from the customers of being excited about kind of that ability to have a centralized platform?

Definitely, I mean, that's part of why we are seeing our business is going because we are -- there's -- it's resonating with customers. Architecturally, the fact that we have a unified approach gives us the ability to play independent on where the choices are. Some people will say, scale across needs to be deep buffered. We believe in that.

But we also can do the scale across with our G300 shallow buffered solution as well. We can have the same functionality there. So that's one example where maybe the scale across here is that you're 20 kilometers instead of 500 kilometers. And you can now pick a solution for that. So that blending of blurring of roles, I think, is very we see that trend is happening definitely. And I see our architecture responding very well to that.

Are you -- I guess the question is like do you end up getting down these rabbit holes where it's like, oh, everybody wants you to customize so much stuff. I mean it's easier for you to customize it, but how is that relationship?

Well, we can -- I mean, we had examples of large, call them, Neoclouds as an example, where they come in and say, we need you to do this particular load balancing because that's how we have architected our network. Can you do it? Nobody else can do it. Can you do it? And we go back and we say, yes, I think so, give us a week, we'll come back and we come back with something, and now we have an optimized solution on an existing platform, not something we had to go and reengineer that software.

And we could take that to extreme. We could -- if we wanted to and if customers really wanted to, we could hand them the compiler and say, knock yourself out. And I think long term, that can be an advantage because the competitive nature of where we are right now is like everybody is fighting with the same tools in a way. But when you start to optimize your economic model and get your network 5% more efficient over time, I think that becomes a vector of competitive for the hyperscalers.

And what is that process of kind of -- we spent a lot of time about Silicon One with the hyperscalers, but kind of the cost benefit that you guys get or the process of moving that throughout the kind of whole Cisco portfolio?

Yes, I would start by -- and we can argue about that. But obviously, it costs money to build silicon. It's not for everybody. It's a big investment, has been a big investment for Cisco for a long period of time. And that investment is paying back and is starting to kind of get paid back as we are deploying our solutions into not only hyperscaler platforms, but also into the rest of our portfolio.

And -- and one way to think of that is the alternative is to go and buy these chips from companies like Broadcom. And if you look at Broadcom's gross margins, they're pretty healthy. So you can imagine that there is some margin stacking going on in there. And that over time, and there's some pricing power and all sorts of good things, supply and all sorts of things that we get out of this. And I think you'll see us see some of those benefits show up as we are deploying and our product lines are migrating to full adoption. And we're still at the beginning of that, I would say.

Okay. And then I'll ask it because somebody else in the audience will, if I don't. Just how do you see your opportunities in the spine within hyperscalers, which seemingly gets the most attention.

I mean we have adoption with hyperscalers, 5 out of 6, I think we have said repeatedly, and we have adoption in many different roles. The scale-out opportunity is where we are seeing a lot, but also in the scale across where we see a lot of adoption. And the silicon that we built is optimized for these applications, and we can reprogram them so they can fit the role that is needed. So I think we feel very good about the space. But there's a lot more dynamics than just technology. There's also business models and other partnership that gets into that.

So I think when I look at our position, it's like you have to be eligible, right? You have to have products, you have to be eligible. You have to be a trusted vendor. You can -- and you can be trusted to show up and solve problems as they are. I think we are on that journey. I think we have earned trust in these -- which is a very big different like for 10 years ago where we were just not relevant.

Yes. And then maybe just last question to co-packaged optics has been -- we've had every optical networking vendor here all week talking about it. You guys have not only Leaba, you have Luxtera, you have a lot of pieces of the portfolio that kind of help. Just how are you guys thinking about the co-packaged optics opportunity?

Well, first of all, it will happen at some point in time. And there is a lot of push in the marketplace for it to happen maybe sooner than later. But at the end of the day, it's a big transition for the industry. Customers will have to get comfortable with not only the business model associated with this and vendor concentration and so forth, but also the operational realities of how does this stuff actually perform in a network, so that stuff is not overnight. It will not be flip a switch.

You mentioned Luxtera and Luxtera is an acquisition that was done a number of years ago. It's also in my group. And it is have some of the best silicon photonics technology, which is critical for the CPO adoption. And while we haven't announced anything yet, we did do a technology demonstration of a CPO solution in 2023. So kind of watch the space.

Okay. Got it. Mark, I'm going to circle back to you. You're seeing a lot of this campus switching base go through a larger refresh. Just what inning are we here? And then just how is that conversation that maybe is starting with Campus refresh and company to mean kind of all this part of what you've called AI modernization across the greater stack.

Yes, I'd say we are -- I think Chuck characterized it as the top of the first inning even. So very early on, multiyear, multibillion-dollar opportunity. I think that as I look at Campus, I would say there's probably more reasons today for customers to upgrade in terms of the AI capabilities, making your network smarter, faster, more autonomous, bringing together of the network and security, the fact that there's a real recognition that aged out equipment is a big time security risk, given the sophistication of security threats today with AI.

And so I think there's like more reasons than ever to upgrade and probably our portfolio is in as good shape or better than I've seen it in a long, long time in terms of all the refresh that we've done kind of up and down the stack as well.

Got it. And then just -- you mentioned security, maybe security has kind of underperformed expectations, at least from an investor standpoint over the past couple of quarters. Just where do you see your guys in terms of being able to kind of position yourself better or some of the changes that are just taking time to kind of show up?

Yes, I'd say probably the biggest headwind that we've seen in terms of just revenue and security is this transition that we're seeing with Splunk and customers moving to cloud versus on-prem.

The accounting is different instead of recognizing it upfront, you recognize it ratably over the life of the contract. In the end, that's actually a really good transition. We can deliver features faster. They can adopt technology. And we see the longer-term prospect of revenue actually much higher than we would on-prem. But that's a headwind we're facing.

On the sort of organic or ex-Splunk security side, we're actually seeing really good momentum that it's just going to take some time for it to translate into revenue growth, given that a lot of the offers are ratable.

And we still have some legacy business as well that is a headwind there. But in terms of new offers, you look at Hypershield, you look at Secure Access. You look at XDR and AI Defense, that just that -- those products right there, 1,000 new customers that we signed up in Q2 alone, which was 100% more than we signed up in Q1. And so we're seeing really good traction.

We think by the end of this fiscal, if you just -- you kind of put the transition aside for Splunk, which is what we talked about. Just the organic security business, we think we'll be approaching double digits. So we think we're on the right track. It's just going to take time. Recognize it's taken a little longer than we would have liked, but we also were real clear and took the risk out of the guidance that we don't need any substantial increase from here.

I get this question a lot from investors. I'm sure you mean it as well. Just in terms of why does Cisco need to stay together? There's a lot of different businesses. There's a lot of different areas? And so how do you kind of express what the value of Cisco together is?

Yes. I think I have gotten that question. But I think it's just a -- I think it's one of the unique advantages that we have and really providing a full stack for AI use cases as well as more traditional use cases that includes silicon optics, networking, observability, security, collaboration, everything that our customers really need to get the most out of all of those technologies, if you will.

And I think that together, those really just provide our customers to be able to unlock value that they wouldn't be able to do otherwise. And we find it pretty compelling. We're really the only one that can bring all that together.

Yes. And then maybe just last question.

It's also a key part of our overall profitability. Each one of those plays a role as well.

Cash flow. minor topic. And that kind of rounds out the conversation just in terms of capital allocation, you talked about there's various pieces of the business generate a lot of cash. Just how do you think about capital allocation? And we've seen some depressed software valuations of late. Does that change how your aperture for kind of our appetite for M&A?

Yes. I think no real change in capital allocation policy. What you have seen, I think, with G2 and what he's really driving is more build here and versus buy. But at the same time, we're going to be very opportunistic and understand that there will always be opportunities to ultimately get to market faster or build the technology that we need and to drive revenues faster if we were to do something inorganic, so we'll continue to look at it.

But the big thing is just, is there a moat and can we really drive differentiation, and I think that's why you're seeing more tech and talent, more stuff that is just going to either add a feature or get us to market faster, grow the top line faster.

Okay. Perfect. All right. Well, Mark, Martin, thanks so much for being here today.

Thank you, Meta.

Thank you.

Appreciate it.

Welcome to Cisco's Second Quarter Fiscal Year 2026 Financial Results Conference Call. At the request of Cisco, today's conference is being recorded. [Operator Instructions]

Now I would like to introduce Sami Badri, Head of Investor Relations. Sir, you may begin.

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. 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-over-year basis.

Please note that our discussion today will include forward-looking statements, including our guidance for the third quarter and fiscal year 2026. These statements are subject to risks and uncertainties detailed in our SEC filings, particularly our most recent 10-K 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 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. Q2 was a very strong quarter with revenue and earnings per share both growing double digits and coming in above the high end of our guidance ranges. We delivered record revenue in Q2, putting Cisco on track to deliver our strongest year yet as indicated in our guidance for the full year.

In Q2, total revenue growth accelerated to 10% year-over-year with product revenue up 14% driven by robust demand for AI infrastructure and campus networking solutions. Our strong top line performance, combined with operating efficiencies and solid execution by our teams contributed to non-GAAP EPS growth of 11%, which continued to grow faster than revenue. This strong performance allowed us to return $3 billion in capital to shareholders in the quarter, bringing the total value returned year-to-date to $6.6 billion. Today, we also announced an increase to Cisco's dividend, demonstrating our commitment to returning value to shareholders through consistent capital returns.

Our innovation engine is firing on all cylinders, and our commitment to customers has never been stronger. Last week, Cisco hosted its AI Summit gathering AI visionaries and geopolitical experts to explore the economic, societal and business impacts of AI. While it was clear that expectations for adoption and execution are high, one major challenge still exists: legacy infrastructure was not designed for the performance, speed and security needs of AI.

Our strong first half of FY '26 demonstrates both the power of our portfolio and the fundamental role we play in this once-in-a-generation transition. With our industry-leading networking portfolio powered by Silicon One, AI native security solutions and operating systems, Cisco is well positioned to provide the critical infrastructure needed for the AI era.

I'd also like to address the recent significant increases in memory prices across the market. Leveraging our industry-leading supply chain team, we are proactively implementing three key strategies. First, we have already announced price increases and will continue to monitor market trends and make additional adjustments as necessary. Second, we are revising contractual terms with channel partners and customers to address evolving component prices. Third, Cisco's operating scale and industry-leading position help us negotiate favorable terms and secure supply to fulfill current and future demand. Overall, we feel confident in our ability to manage this industry-wide dynamic better than our peers.

Now let me comment on the strong demand we saw in Q2. Overall, total product orders grew 18% year-over-year, even on top of double-digit growth in Q2 fiscal year '25. Excluding hyperscalers, product orders were up 10% year-over-year, demonstrating the broad-based demand we see for our technology globally. Enterprise product orders were up 8% year-over-year in Q2 with strength across our entire networking portfolio. Public sector orders were up 11% year-over-year, with double-digit growth across all geographies. Product orders from service provider and cloud customers accelerated in Q2, growing 65% and driven by triple-digit order growth across hyperscalers. We also saw continued growth from telco and cable customers in Q2 with orders up almost 20% on a combined basis.

Now some color on demand from a product perspective. Growth in networking product orders continued to accelerate, reaching more than 20% in Q2 and marking the sixth consecutive quarter of double-digit growth, driven by service provider routing, data center switching, campus switching, wireless, servers, and industrial IoT products. Within our campus networking portfolio, we are seeing strong demand for our next-generation switching, routing and wireless products, which continue to ramp faster than prior product launches. We are delivering AI native capabilities across these products, including weaving security into the fabric of the network and modernizing the operational stack of campus networks. These new capabilities, combined with an installed base representing tens of billions of dollars across early catalyst generations nearing end of support, underpin the multiyear, multibillion-dollar refresh opportunity for Cisco.

We continue to see strong demand for our industrial IoT portfolio, which has now grown double digits for 7 consecutive quarters. This demand is driven by onshoring of manufacturing to the United States, the increase of AI workloads at the network edge and the emergence of physical AI. AI infrastructure orders taken from hyperscalers totaled $2.1 billion in Q2 compared to $1.3 billion just last quarter, and equal to the total orders taken in all of fiscal year '25, marking another significant acceleration in growth across our silicon systems and optics. We shipped our 1 millionth Silicon One chip in Q2 and plan to deploy our Silicon One architecture across our high-performance networking systems by fiscal year '29.

Just this week at Cisco Live Amsterdam, we introduced our 102.4 terabit per second G300 chip positioning Cisco in an exclusive group of silicon providers delivering over 100 terabits per second switching speeds. In addition, we launched 4 new systems powered by G300: the Cisco 8000 and Nexus 9K 102.4 terabit systems offer flexible air cooled options for traditional data center architectures as well as liquid cooled option designed for the latest ground-up facilities. Silicon One's programmability puts Cisco's Silicon in a class of its own, capable of adapting to a wide range of use cases and network infrastructure designs. We also announced two new pluggable optics, a 1.6 terabit per second OSFP and an 800-gig LPO, both built with Cisco Silicon photonics technology, delivering greater efficiency and reliability in high-performance AI infrastructure.

Acacia reported its strongest quarter to date with triple-digit growth in bookings. All major hyperscalers are deploying its market-leading coherent pluggable optics for data center interconnect and scale across use cases. We see growth in both 400-gig and 800-gig coherent optics and transponder shipments with 800-gig pluggables ramping significantly.

Given the strong demand for our Silicon One systems and optics, we now expect to take AI orders in excess of $5 billion and to recognize over $3 billion in AI infrastructure revenue from hyperscalers in FY '26. Beyond hyperscalers, we have a separate AI opportunity across neocloud, sovereign and enterprise customers. We took $350 million in AI orders from these customers in Q2 and have a growing pipeline in excess of $2.5 billion for our high-performance AI infrastructure portfolio.

We continue to develop our strategic partnerships to capture this opportunity. In Q2, we announced plans to form a joint venture with AMD and HUMAIN to deliver up to one gigawatt of AI infrastructure by 2030. This joint venture expects to begin operations this calendar year with a plan to build out 100 megawatts in Saudi Arabia as Phase 1 of the project.

We are seeing strong interest from European customers in our sovereign critical infrastructure portfolio designed to operate in air gapped on-prem environments giving organizations control over sensitive data and critical infrastructure. As AI adoption accelerates, concerns over privacy, data governance and regulatory compliance are top of mind for our customers, making sovereign solutions an essential foundation for building digital trust.

Now shifting to security. In Q2, we continued to see order growth across our new and refreshed products, which represent roughly 1/3 of our security portfolio and includes Secure Access, XDR, Hypershield, AI Defense and refreshed firewalls. Excluding the refreshed firewalls, over 1,000 new customers purchased these products in Q2, representing more than 100% growth quarter-over-quarter and bringing the total of net new customers since launch to roughly 4,000. We have also seen three consecutive quarters of double-digit growth in the number of firewalls ordered. For Secure Access specifically, we booked over 2.5 million users in Q2, and more than 50% of added customers were new logos.

As the adoption of AI tools grow and Agentic AI increases at the network edge, we expect to see continued momentum in our SASE business including secure access and SD-WAN. As mentioned in prior quarters, growth in our new and refreshed portfolio continues to be offset by a decline in our prior generation portfolio.

Turning to Splunk. We saw a similar trend in Q2 as seen in Q1, with continued acceleration to cloud subscriptions and fewer on-premise deals. While this shift is creating a drag on revenue growth, which we expect to continue in the second half of fiscal year '26, Cloud subscriptions enable greater adoption, expansion and faster delivery of innovation to customers. So overall, we are pleased with this transition. Splunk also continued to win new customers in Q2, reaching 500 new logos for the first half of fiscal year '26 and is on track to add 1,000 new logos for the year.

We are accelerating our innovation across our offerings, both for and with AI. At Cisco Live Amsterdam this week, we unveiled major AI defense and SASE advancements to help secure organizations as AI agents enter the workforce. AI defense can now scan models and repositories for vulnerabilities and provide an AI bill of materials for centralized governance. In Cisco SASE, we launched a new Symantec inspection engine that can evaluate the intent of agentic interactions and block sophisticated context-dependent threats. We're also making AgenticOps the operating model for AI-driven IT to enable autonomous troubleshooting, continuous optimization and trusted validation. We are deploying AI agents to work hand-in-hand with human administrators within our product dashboards, AI assistance and AI canvas.

We continue to make AI advancements internally with expanded use cases in Q2 across nearly every organization. Today, the majority of our product developers are using AI coding assistance and working alongside agents, which help us innovate faster across our portfolio. Currently, over 90% of customer experience support cases are touched by AI and automation, enabling us to resolve a greater proportion of complex cases within one day and contributing to our highest ever customer satisfaction scores. Additional use cases across sales, security and trust, supply chain and corporate functions are also providing significant cost savings and efficiency gains.

To summarize, we see strong demand for our solutions across all customer markets and geographies, solidifying Cisco's role in providing the critical infrastructure needed for this once in a generation transition. The value of our innovation is exemplified by Silicon One, which positions Cisco for the broadest range of AI deployments even the most technologically challenging. And with over 40 years of customer trust and global scale, Cisco is committed to leading in the AI era to drive breakthrough innovation, manage complexity and risk and deliver faster business outcomes to customers globally.

Now I'll turn it over to Mark for more detail on the quarter and our outlook.

Thanks, Chuck. We delivered another strong quarter with record revenue in Q2 and both operating margin and earnings per share coming in above the high end of our guidance. For the quarter, total revenue was $15.3 billion, up 10% year-over-year. Non-GAAP net income was $4.1 billion, up 10% and non-GAAP earnings per share was $1.04, up 11%, demonstrating continuing operating leverage with non-GAAP earnings per share growing faster than revenue.

Looking at our Q2 revenue in more detail. Total product revenue was $11.6 billion, up 14% and services revenue was $3.7 billion, down 1% year-over-year. Networking was again the standout with growth of 21%, driven by AI infrastructure and campus refresh. We saw double-digit growth in campus switching, data center switching, wireless, service provider routing, enterprise routing and compute. Security was down 4%, reflecting similar dynamics discussed last quarter with declines in prior generation products and the transition in our Splunk business from an on-prem deal to cloud subscriptions, partially offset by growth in new and refreshed products. Collaboration posted solid growth of 6% led by double-digit growth in devices as well as growth in CPaaS, WebEx and cloud contact center.

Looking at our recurring metrics. Total RPO was $43.4 billion, up 5%. Product RPO grew 8%, of which the long-term portion was $11.8 billion, up 11%. Total ARR ended the quarter at $31 billion, an increase of 3% with product ARR growth of 6%. The total subscription revenue was $7.8 billion and represented 51% of Cisco's total revenue. Total software revenue was $5.7 billion, up 2%. Q2 product orders were up 18% year-over-year. Product orders were up double digits across all geographic segments, with the Americas up 23%, EMEA up 11% and APJC up 15%. Product orders were also up across all customer markets with service provider in cloud, up 65%, public sector up 11% and enterprise up 8%.

Total non-GAAP gross margin came in at 67.5% down 120 basis points year-over-year. Non-GAAP product gross margin was 66.4%, down 130 basis points, primarily driven by negative impacts from mix and higher memory costs, partially offset by productivity improvements. Non-GAAP services gross margin was 70.9%, down 70 basis points. We continue our focus on enhancing profitability and driving financial discipline with non-GAAP operating margin at 34.6%, above the high end of our guidance range. Our non-GAAP tax rate was 19% for the quarter.

Shifting to the balance sheet. We ended Q2 with total cash, cash equivalents and investments of $15.8 billion. Operating cash flow was $1.8 billion, down 19% due to the final transition tax payment of $2.3 billion from the 2017 Tax Cuts and Jobs Act and continued investments to meet growing overall demand as well as specifically for AI infrastructure.

From a capital allocation perspective, we returned $3 billion to our shareholders during the quarter, comprised of $1.6 billion for our quarterly cash dividend and $1.4 billion of share repurchases with $10.8 billion remaining under our share repurchase program. Given the confidence we have in our business and the strength of our ongoing cash flows, Today, we announced that we are raising our dividend by $0.01 to $0.42 per quarter. This dividend increase demonstrates our commitment to returning a minimum of 50% of free cash flow annually to our shareholders.

To summarize, we had another quarter with top and bottom line performance exceeding our expectations, driven by strong order growth and robust margins, all demonstrating the power of our innovation engine to drive strong top line growth as well as operating leverage to fuel profitability. We remain focused on making strategic investments in innovation to capitalize on the significant growth opportunities that we see ahead. This will continue to be underpinned by our commitment to disciplined spend management and this powerful combination that continues to fuel strong cash flow and our ability to return significant value to our shareholders.

Turning to guidance. Please note our Q3 and fiscal year 2026 guide assumes current tariffs and exemptions remain in place through the end of fiscal 2026. These assumptions remain unchanged from prior guidance. Looking ahead, you can expect us to continue our focus on durable growth with financial discipline driving operating leverage and continued capital returns.

For fiscal Q3, our guidance is as follows: we expect revenue to be in the range of $15.4 billion to $15.6 billion. We anticipate non-GAAP gross margin to be in the range of 65.5% to 66.5%. Non-GAAP operating margin is expected to be in the range of 33.5% to 34.5%. Non-GAAP earnings per share is expected to range from $1.02 to $1.04. We are assuming a non-GAAP effective tax rate of approximately 19%.

Cisco is positioned for its strongest year ever, as indicated in our guidance for fiscal year 2026, which is as follows: we expect revenue to be in the range of $61.2 billion to $61.7 billion. Non-GAAP earnings per share is expected to range from $4.13 to $4.17.

Sami, let's now move into the Q&A.

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

Amit Daryanani with Evercore ISI.

I guess my two questions, maybe the first one, you folks obviously had very solid momentum on the AI side with a $5 billion AI target for fiscal '26. Can you just help us think about the mix between Silicon One versus optics in the book? And then really, as you think about some of the newer products like the G300 and the P200 on the Silicon One side, do you see these opening up incremental markets or workloads for Cisco? Or is it more about deepening your existing relationship? I'd love to just kind of understand that side.

And then maybe on a follow-up, Mark, you just touched on the gross margin decline in April. I assume it's all memory related, but I'd love to just understand what's happening there. And if you feel like that's a trough on the gross margin and memory issues or not.

Amit, thank you very much for the question. So on the AI infrastructure side, the $5 billion that we now have raised our estimates to during fiscal 2026 does not include any of the recently announced P200 products nor G300, also neither of the optics solutions that we announced this week at Cisco Live EMEA. We talked about this past quarter, the mix was 60% systems, 40% optics. And I think that's been reasonably consistent over the last few quarters.

Your final question about whether these open up new markets, I think these will allow us to continue to sell next-generation solutions across our existing customer base, and I think it will continue to help us gain traction with the neocloud, the sovereign cloud, et cetera, help us get the scale across technologies out and continue to sell these solutions to existing customers as well as new customers. But just to reiterate, P200 and G300 are not in the $5 billion expected for fiscal '26. Mark?

Yes. Thanks and I'll take the gross margin question. So really, as you look at the Q3 guide, there's two primary things at work. One is mix, and the other is memory prices, as you mentioned.

First off, I just want to acknowledge the significant growth in hardware that we're seeing across our existing and new platforms that have been introduced and the fact that they're accelerating much faster than previous launches; Secondly, in terms of memory, we're going to control what we can control. And Chuck talked a little bit about the fact that we've already announced price increases. We're going to stay very close to that and adjust as needed going forward.

Secondly, there's some Ts and Cs with partners and customers that we're going to adjust to really bolster our position there.

Thirdly, it's really leaning into our financial strength and our world-class supply chain. If you look at it, it's evidenced by our advanced purchase commitments that just in the last 90 days are up $1.8 billion. If you look at it on a year-over-year basis, they're up about 73%. A big chunk of that is around memory.

And then lastly, I think in terms of focusing on what we can control, we're focused on financial discipline and profitability. And we're focused on growing EPS faster than revenue. You saw that in Q1, you saw it in Q2 and it's also in our full year FY '26 guide. And if you -- we don't guide Q4, but if you go sort of back into the implied guide for Q4, you'll see it there as well.

Tal Liani with Bank of America Securities.

I have two questions. The first one is, when I look at product revenue growth, the entire outperformance came from networking which grew 21.1%. Can you drill down and tell us -- you spoke about orders in the prepared remarks. Can you speak about revenue growth? How did the various segments of networking grew and where did the outperformance came from?

The second one is -- I can back out your 4Q guidance and when I look at the sequential growth from Q3 to Q4, it's only 1.4%. So normally, it's 5%, 6%. This is a seasonally strong quarter. So why is it so low? Is it just conservatism? Or is it -- is there a growth concentration in the next two quarters?

Yes. So thanks, Tom. Really, across networking, we're seeing strength, frankly, across the entire portfolio from the campus to the data center, to the manufacturing floor in terms of our IoT offerings as well. So you're seeing very strong growth. Again, we talked about data center switching being 6 out of the last 8 quarters, double-digit growth. It was double-digit growth this quarter. You're seeing strengthening again in the campus and a move to these new platforms that's faster than previous launches. And I think your second part of the question was really just around seasonality. Is that right?

Yes, sequential seasonality.

Yes, sequential. So if you look at it, the Q2 product revenue typically is kind of down mid-single digits quarter-over-quarter, and we were up 5%. And as you look at Q3, really the typical seasonality is kind of low single digits. And that's right where we are despite the fact that we had a huge Q2 in terms of year-over-year growth, 14% and also seasonally a very strong quarter in Q2 as well. So we feel pretty good about the Q3.

Yes. One other comment, Tal, I'd make on that is that I think with the nonlinear nature of the hyperscaler business, it creates a little bit of uncertainty relative to our historical numbers that you're so used to seeing.

Ben Reitzes with Melius Research.

I want to ask the gross margin in a different way. Backing into the EPS guidance, it seems like EPS is a little higher than where the Street is in the fourth quarter, maybe a couple of pennies. And that would imply that the gross margin is expected to trough and get better? Or is that just due to operating margin? And then I was wondering if you could address that. I think the first question talked about the trough. But if I look at the guidance that way, some things getting a little better on the operating margin line. Is that from cost cutting or gross margin in the fourth quarter? And then I have a follow-up.

Yes. Thanks, Ben. So on gross margin, certainly, a lot of what we talked about relative to what we can control and some of the memory price increases, and we're seeing some of that is just timing. So we think that, that will improve as we move forward. And then certainly, we're not here to talk about FY '27. But as you get into FY '27, we think that software growth will improve as well, and that will certainly help us.

You had a second question, I think, Ben?

Okay. Ben, we can catch up with you afterwards. Thank you for the questions. Michelle, we can move to the next analyst.

Aaron Rakers with Wells Fargo.

I guess I want to go more into the architecture stuff, Chuck. As we think about the AI networking opportunity and the traction that you've been seeing, I'm curious of your updated thoughts on how you view scale up as an opportunity for Cisco. What have you been doing? When does that start to maybe materialize if you see that as a large opportunity?

And as my second question, I'm curious, given the traction you're seeing in the neoclouds and the sovereign opportunities, just maybe an update of the relationship, the engagement you've had with NVIDIA and how much that started to become maybe a driver outside of the hyperscalers?

Yes. Thanks, Aaron. So we haven't made any announcements on scale up. I think in the past, I've said we do plan to participate in it, and we expect in the future to have products and revenue from scale up, but we haven't announced anything. So I'd say stay tuned on that front.

On the enterprise, sovereign and neocloud space, the first thing I would say is that the sovereign side, there's really no real need nor expectation for meaningful impact in FY '26. And so we don't need that to actually accelerate for the guide that we've provided. It's purely upside and in the neoclouds, I'd say, are generally the same. We expect the ramp to begin in second half, but really be FY '27.

As it relates to NVIDIA, I think we had a quarter where we really began to see the acceleration of the engagements. We track the number of engagements we have in the field with NVIDIA. And while it was not a massive number leading up, we increased it by 70% from -- sequentially. And so we see those engagements continue to increase. We had -- obviously, Jensen was recently with us at our AI Summit and talked about the power of their GPU and compute with our networking and security, which was emblematic of the relationship and why we're doing it. So we're starting to see some early success there, and I think it will only ramp from here.

Meta Marshall with Morgan Stanley.

Maybe building on that last question. Just kind of the -- coming out of that AI Summit, clearly talking to a lot of customers. Just where are you seeing or how evolved is that enterprise appetite for investment? Or when do you think that, that kind of enterprise AI story takes off more?

And then maybe just as a second question, just in terms of the price increases, any demonstrable kind of change to demand or forward ordering that you saw as a result of that?

I'll take the first. You take a second? Okay. So on the AI front, I think, first of all, on the AI Summit, I think if you looked at the lineup of representation that we have there. I think it speaks to the partnerships that we've built and the role that the entire ecosystem thinks that we're going to play across that ecosystem. So we were really excited about that and got a lot of positive feedback.

On the enterprise side, what we're seeing is early use cases around things like quant, fraud detection, video analytics. We're seeing it across financials, manufacturing, pharmaceuticals. I also see examples in retail where you have -- they're leveraging agents on mobile devices and retail to help their staff do a better job engaging with their customers. And I think you can see the way this is playing out. We're seeing a combination of both investment in cloud-based architectures as well as on-prem. I think if you look at our data center switching business, which is enterprise focused, we've had double-digit order growth 6 out of the last 8 quarters, and we still had positive growth in the other 2. So we continue to see meaningful investment in private data centers to support these applications.

Yes, Meta, on the second part of your question, around pull forwards, we really didn't see anything in the quarter that would point us to evidence that there were any significant pull forwards there at all. We looked at the typical things in terms of linearity in the quarter, we had -- we frankly had good double-digit growth as we move through the entire quarter. We looked at whether we had any pipeline pull forward from future quarters, didn't really see that, looked at software activations, as you'd expect, channel checks and whatnot. And we actually saw the pipeline begin to build really in the out quarters rather than being pulled forward. So I feel good about that.

And in terms of the price increase and whether or not it sort of lands with customers, I would say, as you talk to customers, I think they understand it. They understand this is industry-wide. And I don't -- I haven't talked to any customers that are really willing to delay or defer any sort of strategic investments that they're making in technology. And I think there's no concern that we've seen there yet whatsoever.

I would just add to that, Mark. Mark and I had lunch with one of our absolute biggest customers yesterday here on our campus. And we had a very detailed discussion about the different dynamics that are happening in this space and the pricing pressure and they completely understood and are going to work with us to actually make sure that the entire partnership actually continues to work for both of us. So I think customers -- it's an industry-wide issue. Customers get it. And while they may not like it, they understand that it's a dynamic that we're all dealing with.

I think, frankly, also a lot of them understand that we'll probably be able to manage this a lot better than some of our peers, too. So we'll get through this together.

Our next caller is David Vogt with UBS.

I have a 2-parter around the order numbers. So one, I appreciate the strength that you guys reported in AI orders. But it certainly sounds like the over $5 billion of order number sounds a bit conservative given the momentum that you're seeing in some of the CapEx programs that have been announced over the last couple of weeks. So maybe if you could talk to why that number is only moving up to in excess of $5 billion. I think you said in the past that it would double the prior year.

And then along those lines, I think you also mentioned that you're only going to recognize over $3 billion in AI-related revenue this year. I think previously you said about $3 billion. So does that suggest that the timing from a revenue recognition perspective, shifts into fiscal '27 and gives you more visibility from an AI infrastructure revenue perspective next year on top of the growth that you're seeing here in '26?

Mark, I'll take the orders and you take the revenue one. I think -- thanks, David, for the questions. On the AI orders and the $5 billion, I think the thing to really remember about these customers is they're nonlinear. So -- and you just have to -- it's quite lumpy. There's only -- there's less than a handful of these major customers that are placing these orders. So we're giving you that number based on the pipeline we see. Clearly, our teams will be working to make that number as big as they possibly can, but that's what you see today. And we just wanted to give you as close to a real number as we could see today.

I didn't mention earlier, but I would also call out that during Q2, we actually won three new use cases across these major players. So we won one optics and two on the system side. And so we continue to see new opportunity. And hopefully, that will result in us giving you a better number at some point, David.

Yes. And David, just on the revenue question. These customers plan well in advance, which has its advantages to it. You're seeing orders converting to revenue. I think that you're seeing a continued ramp as we move through the year. And you're spot on in terms of giving us better visibility on some of the revenue [ rec ] that we would look at into '27 that will continue to follow on.

Samik Chatterjee with JPMorgan.

Maybe one on AI optics and one on non-AI. For the AI part, Chuck, you talked about the new products you're launching in optics or the pluggable optics that you've launched recently, particularly a big focus this year is CPO and sort of support for that in the infrastructure. So any thoughts or insights in terms of how Cisco plans around sort of addressing the CPO functionality, particularly, are you seeing customers sort of look at that as part of your road map? Are they looking for Cisco to have that as part of their road map in optics?

And then for my non-AI part, just trying to get a sense of what you're seeing on the order front for campus in the sense that we see your networking orders did accelerate, but when we strip out AI from it, what are the trends you're seeing on that order front for ex AI networking? And whether the end of life of CAT 4K and 6K, just to put that in context in terms of how much of a tailwind that is to your campus [ orders ].

Thanks, Samik. I would say on the CPO, it's -- we absolutely believe it's going to happen. We don't believe it's actually imminent right now. If you recall, we actually demonstrated this technology, I think, two years ago or more. And so we have the technology to build it, and we will, as customers want it. But today, they want choice. And I think in many cases, customers want the differentiation between optics and silicon so they have choice and they don't get locked in. It reduces their multi-vendor choice. But we did announce the 800-gig LPO, which is -- gives customers huge power savings, greater efficiency for AI scale out, and we'll continue to innovate as well on that front.

I'd say on the campus, basically on the enterprise networking side, let me just give you some color and then Mark, you may want to expand on the order rates. But the first thing I'd say is that when you look at the enterprise switching, enterprise routing, the wireless and the industrial IoT platforms, all four of them the transition is ramping faster in all four of those areas than the prior transitions that we've seen historically at Cisco. So they're all ramping faster.

That being said, we're in the top of the first inning. So this thing is just getting started. So there's a lot of runway. We talked about the network products being up double digits now for six consecutive quarters. Data center switching was up double digits, 6 of the last 8 quarters. All these things are ramping faster. I think WiFi 7 was up 80% sequentially. I think our campus switching business was up close to double digits on orders. So we're seeing a fair amount of momentum and a lot of energy around customers that want to actually move on these upgrades.

Yes. And I would just -- maybe just to add to that, Chuck, I mean, to reiterate, if you look at that 80% bookings growth, excluding webscale, we were still at double digits, 10% year-over-year growth. So really, really strong quarter from an order standpoint. And when you look at the three geographies that we look at, all three grew in the double digits, all three accelerated their growth from Q1 just 90 days ago. So a really strong quarter overall.

Our next caller is Karl Ackerman with BNP Paribas.

Yes, two as well, please. First, the roughly -- or excuse me, I understand that security was weaker as Splunk transition from perpetual licenses to SaaS. However, could you speak to the order rates and new product demand traction of your security portfolio that could [ augur ] well for recovery in your security offerings for the balance of '26.

And just as my follow-up, please. Chuck, I noticed you indicated that your $5 billion of AI orders does not include your G300 or the 100 terabit switch portfolio. But more broadly, can you talk about the order rates you are seeing for your 51 terabit and 100 terabit data center switch portfolio because demand seems to be accelerating there?

Yes. Thanks, Karl. So on the security update. Here's what I would say. There's really three key points. Number one, we talked about the Splunk transition that has a short-term revenue headwind with the accounting treatment of on-prem versus cloud.

The second thing is that we -- on the new products, and these are products that largely didn't exist three years ago. This is everything from Secure Access to XDR to AI Defense to Hypershield, we had 1,000 new customers of those products during the past quarter and it was up 100% sequentially. So we're seeing the ramp now where customers are adopting these new products, which is a really good sign. And there's 4,000 customers who have bought one of those products since we built them, and these are -- again, these did not exist. So that's positive.

We -- on the refreshed firewalls, we had our third consecutive quarter of double-digit unit growth, and we just launched our new high-end refresh firewalls in the last 120 days. So we expect that to continue. And where that would lead us is as we exit Q4 this year, the organic Cisco security portfolio will be growing revenue close to double digits as we exit. So the teams are -- they're a little behind where we -- not the teams, but this portfolio is a little behind where we thought we'd be exiting the year, but it's still performing relatively well. It's just masked right now with the Splunk situation on the accounting treatment.

On the $5 billion and the 51.2 product, I think we're selling as much as we can build at this point. We see demand across a couple of major customers that are literally asking for as much as they can get. And we're seeing huge acceleration in the 800 gig optics. We're seeing huge acceleration, obviously, in the Acacia portfolio. So I think the demand is there, and we just need to continue to build capacity.

Yes. I think -- and just to add to not only demand but also continuing to make inroads with each of these hyperscalers across the portfolio, but also additional design wins that we saw this quarter as well.

Michael Ng with Goldman Sachs.

I have two as well. First, I was wondering if you could just talk a little bit about the EBIT margin outperformance in the quarter. Was that driven by cost savings? Is that a mix benefit as you do more with hyperscale customers?

And then second, I wanted to just revisit the comments around the April quarter gross margins. And I know you talked a little bit about that just being timing. Is the implication that you'll just take more pricing over the coming quarters to kind of recover a lot of that commodity cost inflation or is that a timing comment around just the mix of AI revenue perhaps? Just would love your general thoughts on that.

Yes. So thanks, Michael. So I'll take the first one just on the op inc percentage. As you pointed out, 34.6% for us is actually the highest in 4 quarters. So even though you saw a little bit of margin decline on a quarter-over-quarter basis and certainly year-over-year, we're just continuing to execute very well. And you're seeing us be very financially prudent in our expenditures and just really determined to drive profitability, and you saw that in the fact that and top line, both grew double digits, but the EPS line actually exceeded the top line.

And then in terms of the timing, I think the measures that we talked about in terms of price increases and then some of the Ts and Cs that we're going to be modifying with our partners and customers, those just take a little bit of time to run through. So you'll start to see that over time.

Our next caller is Pierre Ferragu with New Street.

Yes. So Chuck, can you give us a sense of how your commercial momentum is evolving on the cloud, like on the AI front? So you mentioned a couple of use cases you won in -- with large customers and hyperscale. So I guess it's really like a kind of a use case gain. So what can you tell us about a typical use case where you make a difference where really you beat your main competition. So what's your -- how do you win there? And then as you're expanding into the neocloud opportunities, the broader market, when do the dynamics look there? Is that a similar like use case focused kind of competitive game? And are you like [ selling ] source for your clients? Or do you see actually clients to go for like Cisco as a primary source for [indiscernible] for AI.

Thanks, Peter. So on the first one, I would say, how do we win? First of all, our optics portfolio is really just well received and is I'd say #1 in the world. I mean, we have the best optics portfolio that our customers want. And we just need to increase capacity to actually continue to deal with more and more demand there.

I'd say on the system side and the silicon side, we've talked a lot over the years about their desire to have silicon diversity. So that's a starting point for why they're interested in us being successful within our systems when we build these. I think there's two big differentiators for us. There's programmability of the silicon and then there's just the power efficiency that we're building into it. And those generally -- and I think the way we do business and the commercial relationship that we have, the team -- the partnership that we have with them, I think they just -- they appreciate that, and I think it contributes to their desire for us to be able to do more with them.

The second was neocloud, right?

Enterprise.

Enterprise. Yes. On the enterprise side, there's opportunity across AI factory with NVIDIA so with GPUs. But what we really focus on and what we're most interested in is networking and security, in addition to strategically where we need to position the GPUs. But by and large, we are the network standard, particularly when we're partnering with NVIDIA in the enterprise right now. So that's what we see happening. And again, we think bundling our security solutions like AI defense and those sorts of technologies in these AI factory solutions is a good opportunity for us as we go forward.

James Fish with Piper Sandler.

Just on the campus side, going back to a couple of questions here and trying to bridge it all together. You guys have talked about the refresh opportunity historically as more of your fiscal '27. But now you're starting to say it's ongoing. I get it, Chuck, first inning of a [ Braves ] game for you, right? But lots have changed. And then why wouldn't they start -- why wouldn't customers, especially on the enterprise, start pulling in their orders here given the pricing increases that they know are coming. These are smart buyers. And it kind of reminds a lot of enterprise out there of the supply chain issues a few years ago where we did start to see a pull in of orders.

Yes. Okay. Thanks, Jim. So first of all, I think we are seeing a ramp in an acceleration. And I wasn't sure if this is what you asked, but I'll make a couple of comments just to be clear. Many of these customers learned from COVID and they recognize that in these major times of transition, they don't want to ever be stuck with technology that's not modern. And as they look at the architectures that are required for agenetic AI, the security architecture, the network architecture, the latency requirements, all of that is leading them to look at making sure that their infrastructure is modernized. So that, combined with the fact that there's been a lot of learnings over the last couple of years about equipment that's passed last day of support and the cybersecurity risks that are associated with that. I think those are well documented, and that's another thing that's leading them to do so.

I would say that on the core networking side, the memory content is not quite as high as what you'd see in compute platforms. And so the price increases are more nominal than they are in sort of the compute systems that you see some of our competitors talking about and the things that are a larger percentage of their portfolio. So do I think customers will try to buy ahead in some cases? Perhaps, but I don't think it's going to be a big trend in the networking side of our business. And [ UCS ] for us is just -- it's not as big a percentage as it represents for some of our peers.

All right. Thank you, Jim. I want to hand it over to Chuck for some closing remarks following the Q&A.

First, I want to thank all of you for being with us today. And I also want to thank our team. I'm very proud of what they've done and the hard work that they put in. And this -- the results today are like -- they're coming together after multiple years of effort to get here. And we want to continue to deliver this innovation to our customers and our teams are dedicated to do so. We're proud of the performance, especially in the core.

I think it's important to really think about two big areas of momentum opportunity for us, and we're very early in all of these. First of all, with the hyperscalers and the AI build-outs, the Silicon One architecture, the new innovation that we announced this week, the new use cases that we won during the quarter. We obviously see a growing opportunity with enterprise sovereign and the neoclouds in AI. And then this beginning of this campus refresh, as I said, feels like the top of the first inning. It's a multiyear, multibillion-dollar opportunity for us. So I have a high degree of confidence that we're going to deliver our strongest fiscal year yet.

And again, I want to thank our teams, and I want to thank all of you for joining us. And Sami, I'll hand it back to you.

Thank you, Chuck. Cisco's next quarterly call, which will outline our third quarter fiscal year 2026 results, will be on Wednesday, May 13, 2026 at 1:30 p.m. Pacific Time 4:30 p.m. 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.

Thank you for participating on today's conference call. [Operator Instructions] This concludes today's call. You may disconnect at this time.

Welcome. We are thrilled you're here, and you should be thrilled you're here because there's a lot of Super Bowl traffic, even though the Super Bowl is in Santa Clara, but there are a lot of events going on in the city. So we're really glad that you were able to make it.

This is our second annual AI Summit, and I think the lineup we have this year is incredible. And last year's event was a great event. But today, we're bringing a special group of people together to really talk about the entire AI ecosystem, AI visionaries. And I also want to just recognize the people that are watching this online in addition to who's in the room with us today. We appreciate you spending time with us, and hopefully, you really enjoy the event.

Just so you know, this is all thought leadership and all discussions about what's going on, all things AI. There's no product announcements, just candid conversations, no sales pitches, right, Jeetu?

No sales pitches.

All right. Good. And -- but I want to talk a little bit about what's going on in business and society and where things are happening with AI. I think that last year was a big turning point, as we all know.

And for all the enterprise customers who are here this week, we all believe 2026 is going to be a turning point for AI. And we believe that this will be the year of agentic applications, and we believe that all of us know that the impact on what we do every day is going to change significantly. And whether we're talking to our enterprise customers or governments around the world, we know we have to embrace this. Many of us believe it's the biggest transition that we've ever seen, and I'm old. I've been through a lot of them. And this, I do believe, will be more revolutionary, and it's moving faster, obviously, than anything that we've ever seen.

There are lots of questions and discussions about what does it mean to your enterprise infrastructure? What does it mean to your security posture? What does it mean to application development cycles? All those things are really important. And all of us in this room know that those of us who embrace AI will ultimately be the winners. And so that's what this is all about today. And we hope that we can be a little bit -- a little part of helping you actually take advantage of what's going on in this industry right now.

One other topic I just want to touch on quickly is trust. You'll hear Jeetu talk about the fact that one of the deficits that we have in deploying AI, one thing that bothers us is trust, whether it's trust in what's going to happen to my data, trust in the models, trust in your infrastructure, trust in the agents, trust in the partners that you're working with. This is a very big deal, and it was front and center in Davos. I know some of you in this room were in Davos. There were a lot of discussions about trust for lots of reasons. But particularly as it relates to AI, whether it's geopolitical dynamics, sovereign dynamics, it's a big topic that we'll also cover a bit today, but it's a conversation that we'll want to continue as we leave here.

And I'm proud of the trust that we have had over the years with our customers and with governments around the world, and we continue to plan to operate in a way that makes you feel good about working with us and other partners that we all bring to the table to actually make this a reality. We all know that it's moving fast, and none of us can do it alone. Therefore, trust is really imperative.

We've been working a lot on the infrastructure and how your infrastructure will have to change to adapt to this. We know that as you deploy agents, your traffic flows are going to change. The latency requirements are going to change. Your security architecture is going to have to change. And we have been working a great deal, whether it's with the hyperscalers on building out infrastructure, whether it's sovereign cloud providers. We're really seeing the enterprise start to pick up. We're doing this through partnerships with NVIDIA, AMD, OpenAI, Anthropic others as well as HUMAIN, G42 and other partners around the world where we're learning a lot about how this is being done. And we hope to be able to bring that to you as we move forward and bring not only the trust but also the understanding of how AI is being deployed all around the world.

I hope you learn a lot today. I hope you have fun. I hope you feel inspired, and hopefully, you'll leave here believing that this was a really good use of your time. Thank you again for being with us because your time is the most valuable thing you have. And we truly appreciate you coming and spending your time with us.

And with that, I will hand it off to Jeetu Patel.

Thank you, Chuck. Good morning, everyone. And this is -- let me start with some bad news is I have no idea what we're going to do next year with the lineup. It's got a little bit of a problem. But AI is advancing faster than any of us had ever anticipated. And the reality is we're going into the next big phase of AI. So we started with these intelligent chatbots back in '22 in November, where you ask it a question, it gave you back an answer that felt like magic. Now we are squarely in this phase of agentic AI. 2025 was a year of experimentation. A lot of people experimented with agentic AI. In '26 you're going to see a lot of kind of ROI getting realized, and you're going to see a lot of these applications get to production.

And then shortly thereafter, as we are starting to see the developments happen at such a rapid pace, what you're also going to see is physical AI is not too far. And so we're starting to see robotics and you're starting to see large world models and all those things are starting to come together. So at Cisco, as we thought about this, what we wanted to do was make sure that we assembled the builders of AI and have conversations rather than just talk about pitching products and talk about what specifically needs to happen so that we can all get the most amount of harness from this movement that's going on right now.

And as we thought about that, the one question that we constantly keep asking ourselves is what are the constraints? What are the impediments that actually hold AI back? And we think there are three major ones. The first one is that we have an infrastructure constraint. We just don't have enough power, compute and network bandwidth, now memory, you start to think about data center shells. To go out and say that the needs of AI. So that's going to be an area that we are spending billions on at Cisco, and I think the industry is spending trillions in making sure that we can go out and fulfill the needs of AI. So that's the first area.

The second is the one that Chuck talked about, which is a trust deficit. We currently -- we need to make sure that these systems are trusted by the people that are using them because if you don't trust these systems, you'll never use them. And this is the first time that security is actually becoming a prerequisite for adoption. In the past, you always ask the question whether you want to be secure or you want to be productive. And those were kind of offsets of each other. And now what you're starting to see is if people don't trust these systems, they will never use them.

So the second area is a trust deficit. We need to make sure that we trust not just using AI for cyber defense, but we trust AI itself, so you got to secure AI itself.

And then the third area is this notion of a data gap. And what I mean by the data gap is these models that get trained, get trained on human-generated data that's publicly available on the Internet. We are now at the point where kind of -- we're running out of human-generated data publicly available on the Internet. And what you're starting to see happen is synthetic data has gotten to be extremely potent in training these models. And then you're also starting to see that the highest amount of growth of data is happening with machine-generated data. And as agents get more and more prolific and as you have these agents working 7 by 24, you will see continued amounts of acceleration and exponential on machine-generated data.

And at Cisco, it turns out, we are at the center of all of this stuff. And what we're doing is working very hard to make sure that we can build out the critical infrastructure for the AI era. And so that's the goal. The past year has been nothing short of incredible in the amount of kind of progress that the team has made. And I think we are supercharging some of the world's largest data centers with the entire stack. We've got Martin Lund here, who runs our silicon business, and we start from that because we want to make sure that we're actually starting with silicon.

So if you look at what we've done over the course of the past year, we started with the G200 chip, which was used for going out and making sure that within the data center, you can have clusters that get networked together because if you have a GPU that's not networked, you don't really have an entire application that can be run. So you have to make sure that -- the network is an essential ingredient.

So the G200 chip was for the scale out. And then we said, what's happening now is these models are getting bigger where they don't just fit within a single data center. You don't have enough power to just pull into a single data center. So now you need to have data centers that might be hundreds of kilometers apart that operate like an ultra-cluster that are coherent. And so that requires a completely different chip architecture to make sure that you have capabilities like deep buffering and so on and so forth, so that you need to make sure that these data centers can be scaled across physical boundaries.

And so that's the second area, and we actually built a chip called the P200 chip, but we didn't just build the chip. We also built the entire system with the 8223 Router. And so that allows you to make sure that these data centers are going to be hundreds of kilometers apart today, but eventually, they'll get to continental scale, right?

And then lastly, you have these -- we are reaching the physical limits of copper and optics and coherent optics especially, are going to be extremely important as we go start building out this data center infrastructure. That's an area that you're starting to see a tremendous amount of progress being made.

Now the reality is, is only a small number of firms can do this entire full stack. And we've been working with hyperscalers that you'll hear a lot from today. We've been working with neo clouds. We've been working with sovereign clouds that you'll hear from today. We're working with service providers. And we're also redefining the AI stack for the enterprise. And you'll hear this with Chuck and Jensen later in the evening, but we've actually got a tremendous partnership with NVIDIA, where we're building secure AI factories. And we want to make sure that we continue to have enterprises find infrastructure to be plug and play because it's far too complicated today.

Now the reality is, why is it important for the enterprise? Because I think token generation is going to be one of the core currencies of every company and every country, because your ability to economically and efficiently generate tokens will be directly proportionate to national security as well as to economic prosperity. And so we need to make sure that we can actually make that as efficient as possible, as productive as possible for the generation of tokens. But token generation shouldn't be just limited to data centers. We should also have token generation happen at the edge.

And so as you start having a distributed architecture, what we wanted to do is we've also provided this capability of a Unified Edge where you can have these branches, and the edge where you can start having inference processing occur rather than just being done in the data center because sometimes, the kind of latency requirements that are needed for applications, you might not have the time to go and do a round trip to the data center.

So regardless of where you are wanting to generate tokens, we want to make sure that we can actually participate, which is why we're also pioneering AI safety and security, because one of the things we want to do is make sure that we are not just making sure that these networks are connected, they're securely connected. And so this notion of not just using AI for cyber defense, but also securing AI is a pretty important dynamic. And last year, at this stage, we launched a product called AI Defense. And this year, I'm delighted to announce that we're actually starting to get the world to be safer because companies like CVS and companies like NEC, they're starting to use these products within their environment so that they can actually secure AI itself.

And then the other thing that we've done is we've made sure that we want to make sure that this becomes economical. So we're building our own foundation security models and making sure that a lot of those are available in the open source community, and we will continue to keep doing that.

So a combination of products that we build as well as the foundation security models are going to be pretty important. But we're also reimagining how agents will simplify operations because one of the big areas that you're starting to feel a tremendous amount of pressure is this infrastructure is getting very complicated, and it actually has to be managed in an extremely low friction manner. And agents can really help materially lower the cost of complexity for organizations.

And so we've built this entire apparatus and scaffolding for AgenticOps, where these agents can go out and make sure that they can detect when something goes wrong before it goes wrong and then proactively remediate and fix it so that you don't spend majority of your time investigating an issue during an outage. You spend majority of your time responding and remediating to that outage as quickly as possible.

And we want to make sure that, that once again, happens with models that are built that are very bespoke for the infrastructure that you're building.

And so these are the kind of investments that we continue to keep making. But the point in time in the industry that we are at right now is a really interesting juncture because AI is itself helping us accelerate the use of AI. And last year, when we talked about this, it was -- it seemed like a far-fetched goal, but 70% of all AI products now at Cisco are using code that's generated by AI, right? 70%.

And I would say that what it's not going to -- within the year 2026, we will have at least close to half a dozen products that will have 100% of the code written by AI rather than written by humans. Now humans will still have a very valuable role to play because they're going to make sure that they're writing specs and they're making sure that they're actually going out and reviewing the code. But the bottleneck is no longer going to be around the writing of the code activity, the bottleneck is going to be around the reading and reviewing of the code activity.

And so as we see this progress, it's extremely exciting, and we want to make sure that the builders of all of these technologies are here today. And what we want to do is have some candid conversations. We have not overly prepared the conversations. We want to make sure that they flow and they actually go in the directions that people wanted to go. That's why we wanted to do it in a fireside chat format rather than making sure that people came in and did keynotes.

And as AI innovation actually continues. One of the challenges that we have that we have to collectively as a community address is AI is moving at a pace much faster than organizations have the capacity to absorb it. And that's actually something that has to get solved for. And that's a change management exercise. That's a cultural exercise. That's something that we have to make sure that we collectively as a community work together on because just building bigger, faster technology that doesn't actually keep in mind how that technology can be absorbed is not really going to go out and get us what we need.

So it's truly a paradox of progress. On one hand, everyday AI is solving harder problems. On the other hand, you could start to see that we are struggling with articulating concrete impact on ROI with these technologies on a consistent basis, uniformly distributed across the entire globe.

And so to resolve this paradox, we have to answer some really tough questions, and that's what we want to make sure that we actually have these conversations with. And by the way, I apologize from the beginning, it's going to be a long day. I didn't know -- we didn't know if a way to make it any shorter, but this will test your stamina.

But we want to make sure that we actually ask some tough questions. So for example, where is the ROI for AI going to come from? Is it going to come largely from efficiency? Is it going to come from us being able to solve problems that we have never been able to think about being solved before that are going to be some things that are going to be in there. In this increasingly nationalistic world that we're starting to live in, is sovereignty more important than raw intelligence? Because every country, every company might want to actually make sure that they are actually focused on resilience. And sovereignty is a proxy for resilience.

Our language models going to be enough to get us to the movement of AGI, or are you going to need more? Are they going to be large world models is physical AI going to need to be a necessary ingredient as we actually start to work these things together. And if physical AI is something that we believe is going to be a necessary ingredient for us to get to AGI, then what does that ChatGPT moment look like for physical AI? How far are we from that? These are the kind of questions we need to make sure that we ponder.

So what we don't want to do is actually talk about individual technologies but talk about the larger trends that are happening in the market. Now it's questions like these and many more that hopefully we'll explore today, and that's what we've built Cisco AI Summit, and we're going to stay true to that form as we continue these conversations over the years.

We're good? Yes. All right. Hi, everybody. Thanks for coming. Tim Long, Barclays' IT hardware, com equipment analyst. Happy to have Cisco with us today. Mark Patterson, CFO, he's been with the company a very long time. So looking...

Yes. 26 years.

26. That's a lot. A lot of years, a lot of years. So I appreciate the time. I know it's a very busy day, a lot going on in the world here that we're living in.

So let's start off with kind of a few of the hotter topics. Obviously, we'll start with AI. You guys gave some pretty good numbers where you're kind of couching. You've been couching orders for a while, couching the revenues and the revenue move. So maybe if you could touch on a little bit on kind of the strength you're seeing in orders and revenues for AI-related optics, optical and optics and systems. If you could kind of talk about the traction of the products and how -- what's the breadth from a customer standpoint and a use case or a product standpoint, that would be helpful, to start.

Yes, we're seeing a lot of success. So if you just -- maybe if you just go back 15 months ago, we -- as we really entered our fiscal year '25, I think a lot of folks were unsure what is Cisco's role in this whole AI build-out. And so we put up a target for FY '25 for the first time for really two reasons. One is to really show the criticality of the technology that we have, that we supply the industry. And second, just the materiality overall to just give people a feel for kind of what that looks like.

So we put a target of $1 billion up. We actually ended up doing more than double that in FY '25. And just over $2 billion for the year and recognized $1 billion in revenue just for the top hyperscalers. And so we'll talk, I'm sure, more about the neocloud, sovereign cloud opportunity, et cetera. But if you stick just with those top hyperscalers, you fast forward then to this year, we started this year in Q1, and we continue to see a lot of momentum.

We -- in Q1, we actually had those top hyperscalers place orders with us for $1.3 billion in just Q1. So continued strength. And you can't put out a target without folks wanting you to put out another target. So we did that. And in Q1, we said we would do at least double what we did in terms of orders in FY '25. So somewhere north of $4 billion is what we see landing there and then triple in terms of revenue. So $1 billion a year ago and we said we'd do $3 billion in revenue, and we're off to a really good start.

Great. Maybe just looking at the pieces of it. On the system side, so obviously Silicon One is important here. So kind of what's the feedback? Is that the main reason you're winning? Or just a little on the system side, what's driven the success?

Yes. So if you look at what we're doing with the hyperscalers, a couple of things, so one is, if you go back to FY '25, beginning of the year was really a lot of optics that was sold in, about 2/3 of it was optics and 1/3 of it was systems. And the second half really played out like we said it would in terms of really flipping that ratio to 2/3 systems. We see that same kind of mix really probably continuing into FY '26.

But if you go to -- I think, a big differentiator for us is the silicon. And our hyperscalers wanting silicon diversity but also they really like the power efficiency, the cost savings, some of the programmability of the chips as well. And so at times -- basically, what we said was, look, you can buy the chip, you can buy our software, you can buy the system, whatever you want to do. And in most cases, they're buying the whole system.

Okay. And yes, to follow-up on the systems part of it, a lot of talk lately, scale-up Ethernet, scale-across, whether it's optics or Ethernet or both, can you talk -- we don't have to get too technical here, but talk a little bit about kind of new use cases that are still emerging, which provide more opportunities for order growth in the switching part of the business?

Yes. So Silicon One can be used in really all the switching roles, if you will, just in terms of top of rack and leaf and spine, first of all. The Cisco 8000 is also used in routing use cases as well.

When you think about kind of scale-up and scale-out and then scale-across, today, we're in largely scale-out, but also scale-across with our Optics portfolio that we have as well. We just introduced a new Silicon One chip, the P200, which will really be focused on the scale-across and a system that will go with that, that I believe is the 8223. Sami can always correct me if I'm wrong, but -- and those will be available in kind of the spring time frame.

So the one that we have said, we will be looking to be a part of that's really probably more of an FY '27 and forward opportunity would be the scale-up opportunity as well as we'll look to get into that, too.

But two things. We were talking about this a little bit earlier in some of the investor discussions that I've had. I think that as you look at the AI infrastructure play in hyperscale, two things that are of particular interest when you sort of evaluate our progress and how things are going, and you look at this $1.3 billion of incremental orders that we just took in our first quarter is, one, is this like all one webscaler? Is it one hyperscaler? Or you having actually success across others?

And then two, I think it's some of these roles that you get designed into, they can place orders against for 3-plus years. And so I think understanding is there continued success? Or is it just buying off of sort of original design wins or use cases. And in both cases, if you take a look at just that $1.3 billion, just for example, we had four hyperscalers, not just one but four hyperscalers within that order set that grew more than 100% year-over-year. So if you just compare the orders that they placed on us in Q1 of FY '25 to Q1 of FY '26, you had four different hyperscalers growing over 100%.

And then when you look at sort of design wins and use cases, again, it's continued momentum. If you look at, again, that $1.3 billion, we actually had four new design wins just in Q1 alone, and those are across four different webscalers.

So all in all, I think it just shows that as in anything else, if you continue to have success, you continue to meet and exceed customer requirements, you begin to be designed into more and more use cases. And we're seeing a lot of momentum in not only their AI infrastructure, but also their traditional cloud spend too, that we're just getting to be a much better partner of all the hyperscalers.

Great. Great. And yes, just on -- just flipping to the Optics, Acacia mostly, side. It seems like that's experiencing really strong growth as well. Obviously, there's a lot of ports out there in need for transceivers and a lot of the technology. So similar positive trend, I would say, in the Optics side.

Yes, definitely, Tim. So I think as you look at it, we sell -- we supply optics to all of the top hyperscalers. And I think if Bill Gartner were here, who leads our Optics and Optical business, probably many of you may have met him in other investor settings, he would tell you our market share is probably 25% plus in the hyperscale space. And so really good success there.

But we also sell optics into service providers, enterprises, there's almost 400 different service providers on a global basis that we sell optics into. And so we feel very good about where we are in that portfolio as well and the momentum that we're seeing.

Okay. Great. You mentioned neoclouds and enterprise. I think maybe we're up to three neoclouds that have been announced in the Middle East. I think -- two or three. Anyway...

[ I don't know ] how you count it.

Yes, maybe -- yes, some of them, I don't know who's who anymore, but maybe discuss kind of time lines that you're expecting for the sovereign business to ramp more meaningfully?

Yes. So this is a space we're really excited about and I think is going to be a significant opportunity for us going forward. What we've kind of said is that export licenses were required. There's a lot you need to do in sort of the early stages plus the early ordering is not going to be material to our revenue in FY '26.

We'll start to see orders really coming online in the second half of our FY '26. But really, I think the ramp will really begin in FY '27, and I think it could run for quite a while. We talked a little bit about the pipeline and the momentum that we're seeing in that space and things continue to ramp there as well.

Okay. And enterprise is still very early phases. What do you think the dynamic will be there?

Yes. I think early days. So what we did was we said, we gave a whole bunch of data on hyperscale, and I talked a bit about that already. And then we said, look, as neocloud, sovereign cloud, enterprise AI get big enough, we'll begin to give you specific data on each of those. But for now, we kind of couple them together and said, look, as you look at neo, sovereign and enterprise together, we've had over $250 million in -- or over $200 million in orders. And we've got a pipeline that's ramping. Our pipeline now on a collective basis there is over $2.5 billion. And so I feel good.

The enterprise is still moving pretty slowly. I think it's still fairly nascent, but everybody continues to believe that ultimately, that's going to be a massive opportunity for us.

Right. Okay. Great. Maybe shifting to a different topic. We'll talk about the campus a little bit. A lot of moving parts here. We'll start with -- I mean this came up a few times on the last earnings call when you talked about a -- whatever, 7% growth number and people did the math where you go from [ 1 to 3 ] on data center and you subtract it and so the rest of the business is guided to grow 4% or 5%. And obviously, there's other things in there, but campus will be a portion of that.

So maybe talk about the campus growth in the context of you do have the end of lifing of products, you do -- end of support for products, so some of the installed base and then you obviously have a new platform as well. So a lot of moving parts in it. So curious how you think about the growth algorithm there? Because it's been a choppy few years. You had really good years and then kind of a correction -- inventory correction year and now it seems a little bit more back to normal, but I'd love your perspective on that.

Yes, maybe I can give a few data points and perspective on some things. I think -- so first off, the numbers that you were talking about that some may or may not have done the math on, I think, was basically, if you back out hyperscale, what's the rest of the business growing. You have to keep in mind though that you probably also want to back out collaboration and services. Those are much lower growth businesses to get to sort of a true campus or enterprise type of networking growth, which would be a little bit higher than kind of what you were thinking.

Networking overall, double-digit growth now for 5 quarters in a row. So we lapped double-digit growth, and I was watching it closely. We wanted to make sure that we didn't see as we now were comparing against a double-digit growth quarter a year ago, that we didn't fall off and we actually accelerated. And so overall, networking was up.

This -- if you look at the overall business, two data points here. So total order growth was up 13%, but if you excluded the webscale business overall, it was up 9%. So we saw really good growth in enterprise, public sector and our more traditional kind of portfolio, if you will.

This campus refresh opportunity, we are in the very, very early stages of. It's a multibillion-dollar opportunity, multiyear opportunity and not going to happen in a couple of quarters or even in the fiscal year, but over quite a bit of time as you look back at kind of different cycles that we've seen in the past.

And I think there's just -- there's a lot of reasons for people to upgrade right now based on AI and security and a number of factors that we can certainly talk through. But you've got kind of two things happening. One is, I think our portfolio is in the best shape that it's been in a long time, if not ever, while I've been at Cisco. And then there's a lot happening around AI and security and aging-out of equipment that, as you stated, we have a significant installed base that's tens of billions of dollars that will come up as end of support here in the next year and the next 2 years.

And so there's just a big opportunity and you've got the portfolio at the best place that it's been, and you've also got a lot of things happening around the enterprise and innovations that are happening that I think are going to drive them to upgrade as well.

Okay. Maybe a little bit on the competitive landscape here. Obviously, the #2 and 3 players got together. So that always causes disruption. So I'm curious, your take on how you view the competitive landscape as the dominant market share player?

It's always a very competitive space. I think that as HPE and Juniper come together, they have a lot of overlap in probably their best performing space, which is wireless. So that's causing, I think, a lot of confusion with customers and what's going to happen there. And we've certainly been able to, I think, capitalize on that.

You also look at just -- HPE has a lot going on in terms of activist pressures and cost pressures. And I think that they're probably at a place that will strain the amount of money that they can spend on innovation at perhaps the time when the innovation, I think, is probably the most critical. So I think we'll do well there. Again, though it's a very competitive space, and we take them very seriously.

Okay. Great. Maybe if we -- you mentioned security, let's pivot there. I think it was viewed as a little bit of a disappointment last quarter. This move to cloud and some older platforms with the newer platforms doing really well. So there's always balancing act of these transitions, but it sounds like pretty confident that we'll exit the year at a much better growth dynamics. So maybe talk to us about kind of visibility and how we get past some of the pressures and turn it into a more steady growth dynamic now that you have Splunk on top of the core Cisco business.

Yes. I think, so if you just kind of zoom out, the three biggest opportunities we have, I think, for sort of outsized growth, if you will, one is in the AI infrastructure space. We talked about that, doing very, very well. The second is really in this campus refresh. Again, it's off to a very good start, seeing really good results there and acceleration. And then the third is really around cybersecurity, including our Splunk business.

And what we said is we feel good about our security business, but it's going to take us longer to get to double-digit growth than we had originally planned for. And there's a couple of factors there, and I can certainly talk more about that. I think that we do see -- first and foremost, we do see getting to double-digit growth. We're committed to getting there as soon as possible. But at the same time, we wanted to sort of derisk our guide, if you will. And we raised our full year by $1.1 billion after Q1. And we let investors know that our raised guide is not dependent upon any sort of significant or material increase to the performance and security.

Now having said that, so as you look at security, there's really like, I'd say, kind of three buckets you've got to really look at for us. One is the new and refreshed products, which is about 2/3 of our portfolio at this point and growing quite nicely, and we're pleased with. We've got 3,000 new customers on four of our new products that have been launched in the last, say, 18 months. And so there's a lot of traction there.

The second area, though, is our prior generation or I'd say legacy, but I've said it. So the prior-generation products and kind of the drag that that's having on the overall growth within security. And that's still -- it's getting to be a smaller portion of the portfolio, which is good, but it's still got a pretty significant drag on the overall growth rates.

And then the third bucket is what I would say is Splunk and it has always been a good double-digit growth performer for us and we're very excited about that acquisition that we've made and the opportunity there. What we saw, though, in the quarter was a timing difference. And what I mean by that is customers are leaning in more to our cloud offers, which is good actually for us. But when you look at the rev rec behind that, the on-prem stuff that we do in Splunk is recognized 100% as soon as you deliver the product. So 100% of the revenue within the given quarter, the cloud business is ratable over the life of the contract.

And so again, I want to stress that it's actually better for us as a company because there's a lot more stickiness in the cloud products. The customers adopt new technologies and new features that we deliver. And over time, we actually recognize more revenue. The net revenue over time is actually higher. But it means that there's a little bit of a timing difference and there'll be more revenue in later quarters.

So those are kind of the three factors that came into, all told, a lower-performing security business. But again, if you kind of go back to what I've said across all three, I think we feel really good about getting to double digits. It's just going to take a little bit more time for us.

Yes. So being 2/3 with the newer product helps. So the prior generation ones are getting smaller and smaller and then it just takes time for the SaaS revenue recognition to catch up with the product...

Yes. And if you look at -- like if you look at our next-gen firewall, our secure firewall business actually was up in the mid-teens. And so I think in key spaces, we're doing quite well. We've got two new firewalls that will come out that will be very competitive in both the ultra-low end and the ultra-high end, which is two very competitive spaces, and those come out in our Q2 here. So think in December, we begin to release that product and that will help us as well.

Okay. And maybe just touch a little bit on observability. That's the other bucket that's supposed to be ultimately mid-teens-type growth. What kind of dynamics are you seeing there? And how should we think about that growth curve?

Yes, we actually had -- we had very good growth in observability in the quarter. It's still a pretty -- it's a pretty small number, which is why we sort of lumped in security and observability. And we've even had discussions about would you lump those in completely in terms of financial reporting, and we've decided not to do that for various reasons. But I think that we had a good quarter.

Our observability, as you look at our unique ability to really look at the endpoint, the application, the network, the data center, the industrial floor and really have observability in and outside of owned assets and unowned assets, we have some pretty unique capabilities there, and we feel pretty good about it.

Okay. Great. Maybe one on the verticals, obviously, a lot of focus over the last 6 months on federal government. I know it's not a huge portion of Cisco business. But if you could just share your thoughts on kind of the roller coaster of DOGE and then shutdown and all this other stuff and then no DOGE. I think it's high single digits or something like that.

So maybe just give us your sense of when do we get back to kind of a normal dynamic because it does feel like underpinning whatever might have happened in the last 6 months, there's a lot of desire for the federal government to modernize its technology stack.

Totally. Yes, there's a few things in public sector that I'd just called out. I think -- so first of all, on a global basis, it actually performed really well for us, double-digit growth. Outside the U.S., it's performing much better. You're seeing a lot of emphasis on defense, in particular, in Europe, for example. And a lot of that defense spending is going into cybersecurity and modernizing their networks and technology, et cetera. And so we feel real good there.

The U.S. Fed is -- they are a very large customer of ours. We saw a big dip a year ago. Basically, what we said as we went into this year is we weren't expecting any kind of massive recovery there, but we saw stabilization and we called for kind of mid-single-digit growth is what the teams were calling for. And we were at or above that actually in Q1. Q1 is our largest quarter for U.S. Fed by far, and Q2 is actually one of our smallest as it revolves around the U.S. federal government year-end.

The thing to keep in mind though for us is it's about 80% of our business now is in defense and intelligence versus the civilian agencies where a lot of the real drastic cuts have happened in the civilian agencies. So we probably have less exposure there.

And then it's just as far as seasonality, we've gotten past our biggest quarter of the year by far and actually showed kind of mid- to high single-digit growth in U.S. Fed and just kind of see this as a good, stable business that will continue with decent growth in kind of that same range that we're seeing right now.

Okay. Maybe shifting to a financial question. You mentioned stable. I think if -- Cisco's viewed as a company with pretty stable gross operating margin profile. So continue to move up the percent of software in the mix. So kind of talk to us a little bit about the margin view over the next few years and how much more room is there for positive mix effects, and does that $1 billion to $3 billion of hyperscaler caused a little pressure, probably not a lot, but maybe a little.

Yes. That's a good question. So first, on just the software piece, we reached a high of maybe 54%, 55% of our total business being subscription few quarters back. What you're really seeing now is we are a secure networking infrastructure company. And at times, it's going to be software, at times it's going to be hardware, at times it's going to be silicon-based, optics. And that's all good. It's all goodness. I think you're going to see us continue to be about roughly half -- probably at least half of our business will be subscription.

On the margin side, while software certainly is real high margins, and we love that, of course. We've got a very diverse portfolio, as you kind of alluded to, and we've been able to manage that. We always have higher-margin geographies than others. We always have lower-margin customer segments than others and products that are higher and lower as well.

The key thing for us, I think, is to focus on really the profitability and -- so by the way, our margins came in at 68.1%, so very, very strong, and we really haven't seen any significant -- any real degradation whatsoever in those yet. But I would just tell you that we'll manage the overall portfolio to be one that is going to show leverage. You're going to see operating expenses growing lower than the top line, a real move to have earnings growing faster than the top line. If you look at our Q4 earnings, our Q1 earnings that we just closed, our Q2 guide that we just gave as well as the full year guide that we just gave, all of those show earnings growing faster than the top line.

So while there will always be some headwinds and some tailwinds in that space, and certainly, you've got tariffs, you get supply chain challenges, but you've got a lot of software we're selling -- there's just a lot of variables. We're committed to managing that to be very profitable and continuing to show leverage as well.

Okay. Yes, I'm glad you're more switching than -- so I don't have to go crazy about NAND and DRAM because it's less of an issue for you, luckily but...

We do have an issue, but it's not nearly as great. So it's going to be interesting to see how that plays out with some of our competition.

Right, right. Yes, it's a headache, but not as big a headache as others. When you think about -- you mentioned OpEx growing less than sales, but as a company that also develops their own silicon, you have a little bit heavier lift than some of your peer companies. So how do you keep that evolution of Silicon One comparable to a Broadcom or somebody else that's making comparable products while still keeping it under that envelope of leverage?

Yes. So we think Silicon One is one of the absolute key strategic differentiators for us as a company. As I mentioned earlier, the largest companies on the planet, the most complicated networks on the planet are using it to run their networks. And so we feel good about the silicon itself. To go do this, it's not for the faint of heart, as you mentioned. I mean, you have to have some significant scale and being certainly one of, if not the largest networking companies on the planet helps us in terms of having that scale to be able to invest and to be able to have the kind of innovation cycles that are required in this space.

And Silicon One will give us a couple -- several advantages, but two in particular. One is really to manage our own supply chain and be in control of our own supply and our own destiny there is important to us. The second thing is really you don't have any margin stacking as we're not buying other people's silicon. And certainly, it's conceivable to say with our scale and the success of Silicon One that not only do we look to deploy that across all of our networking products by FY '29 is what we've publicly stated, but we're moving quickly on that. It's conceivable that you'd see other networking vendors and -- that may or may not even compete with us in certain niches, that they may want to buy that as well. It's not currently part of the plan, but it's certainly possible at a later date as well.

Okay. Great. I think we are out of time here, Mark. Really appreciate it. Thank you so much.

Thank you, appreciate it. Thanks for the time.

And thank you, everyone, for joining.

Thanks.

Thanks again for joining the company here today. We've got with us today. We're excited to have Cisco Systems. With me on stage, we've got Bill Gartner, SVP and GM of Optical Systems and Optics Group. And with Bill is Sami Badri, Head of Investor Relations and Market Insights.

So I thought maybe, Bill, you were here last year, I think a lot of people were familiar with kind of your role at Cisco, but I think maybe for those, maybe a little bit less familiar, can we just start with kind of what falls under your purview, how we think about what's responsible into your business and how that fits into the Cisco portfolio?

Sure. Thanks, David. First of all, thank you for having us. I have responsibility for Optical Systems and Optics at Cisco, and let me just explain the semantics there. Optical Systems include the traditional DWDM systems, dense wavelength division multiplexing that are sold to service providers primarily and hyperscalers who are trying to get signals across the city, or across the country on a fiber optic infrastructure. And competitors in that domain would include guys like Ciena, Fujitsu, ADVA, Infinera, Huawei, ZTE. It's pretty fragmented. Big Iron, there was a chassis-based solutions with line cards and software wrapped around them. That's one business.

The other business is the Optics business, which are the transceivers that we sell for use in switches and routers inside the data center or inside a Campus environment. That's a short distance optic, typically less than 10 kilometers. It's a simpler optic, in many ways, though simple as relative.

And then the third business that I responsibility for is Acacia, which was an acquisition we did just about 6 years ago. And Acacia provides the underlying coherent technology that are used in optical systems and also in our -- in DCO pluggables that are used for things like DCI and scale across networking. Those are the three businesses.

We rewind the clock 12 months ago, we were here. I think it was at the cusp of this surge or tie a wave of demand from hyperscalers regarding AI and optics. So maybe we can talk about what you've seen over the last 12 months? And maybe let's start with optics, because that's, I think, a little bit more relevant. And then the Acacia piece, and what's changed over the last 9 to 12 months, if you will?

Yes. So Acacia has probably provided the most significant upside for us in those three groups that I mentioned. In that we have seen just dramatic demand primarily from the hyperscalers, increasingly from service providers as well, but primarily from hyperscalers for DCI optics, optics that help them interconnect data centers now scale across and really across all of the hyperscalers, we don't announce specific names with hyperscalers. They would actually not give us permission to do that. But we are in all of the hyperscalers and in the top service providers as well.

We've seen tremendous demand. So our -- FY '25, we had significantly more demand than our original forecast for the year. In FY '26, we have -- even after first quarter, increased our forecast for the year for that business as we see just continuing growth and demand for the optics that are used across data centers.

I want to ask you a nuance question, which I wasn't going to ask you. So we talked about this last night, you have historical DCI, and now we're talking about scale across. Can you maybe help investors understand because this was maybe a nuance that I didn't quite appreciate, how scale across is different than traditional WAN? And how hyperscalers and maybe other customers are thinking about the different use cases and where the technology that you bring to bear plays into that sort of dynamic in that need case?

Right. So if you think about the traditional WAN that has a certain amount of bandwidth associated with it. If you just normalize it to one, the scale across network helps solve a problem in that, that WAN bandwidth is constrained. And if you look at the total capacity in a scale-out network, the total capacity relative to the WAN is something like 10x. And if you look at the scale-up network, it's another 10x. So there's much, much more capacity in that scale up than there is in the scale out, and there's much more capacity in the scale out than there is in the WAN.

And what some of the hyperscalers were doing is trying to basically cram scale out capacity through the WAN, and that is DCI, data center interconnect. And it served as a significant source of growth for us, but it was constrained because the WAN just wasn't built for that amount of capacity.

What scale across is, is that it really allows us to connect the scale out networks directly. So you're effectively bypassing the WAN and going scale out to scale out. And what it does is it really allows a service provider to scale the AI infrastructure very, very cost effectively. And given the full capacity of scale out, basically making that look like it was all within the four walls of a data center. So it is a nuanced difference between DCI and scale across.

The optic doesn't change. The optical interface doesn't change, but the amount of capacity does, and it turns out there are some capabilities in the routing or switching that help with that, for instance, if you're scaling across racks in the data center, you're less worried about things like a link flap that might occur. If you're scaling across data centers, now you have a much more significant fiber infrastructure, much more subject to things like link flaps, the router or the switch now has to have things like deep buffers that can accommodate that and recover from that very quickly. And that's -- so it's those things going together that really make for an effective scale across applications.

So is that what you're seeing? So obviously, last quarter, you had an incredibly strong order number for your Optics business or Acacia business. Is that what's driving the strength? I mean, we talked a little bit about it last night at dinner. I mean, it was like a surge in demand that you saw from multiple customers, multiple hyperscalers. Is that kind of the underpinning of what's driving that growth? Is the demand for scale across? Or how would you characterize kind of the driver?

We actually -- I think it's hard for us to tell at times whether that's DCI or scale across. But between the two of them, we're certainly seeing a significant ramp in the demand there across all of the hyperscalers.

And so last quarter was considerably stronger from an optics perspective than your traditional switch, AI-powered switch business. How do you think about over time your ability to be a relevant sort of mix in your AI? Because I think in the guide you've given historically 2/3 are switch, 1/3 are optics. Is that a good rule of thumb for, I think, investors to focus on as we go into fiscal '26, fiscal '27 and beyond?

I think it's a good rule of thumb based on what we know today. The mix change can make that -- at any one point in time, any quarter, we may see a difference. The last quarter was more heavily weighted towards optics. But a lot of that has to do with where customers are in the deployment cycle. They may acquire the switches first, get those switches deployed and then put the optics in. And so if they're sequencing their orders, along with their operations, we're going to see spikes in the demand for switching versus optics.

I would say our best view at this point is you can think about it as about 1/3 for optics and optical versus switching. On any one given switch platform, though, you may see a very different profile. We've -- and also depending on the customer, but we've seen customers who procure a switch with -- fully equipped with 400 gig or 800 gig optics. And in that case -- not the ZR optics. And in that case, it might be 50-50 or even more heavily weighted towards optics if they're using ZR optics. So it is very much dependent on where they are in their deployment cycle and where the -- if they're sequencing orders...

You bring up a good point. So when you think about your holistic hyperscaler customer base, customers move at different paces. They have different technological road maps. There are some customers that are deploying switch and optics at 400, some may skip 800. How do you think about the evolution of your Optics business as we go from 400 to 800 to ultimately 1.6? And kind of how do we think about the timing of -- I know it's not a homogenous group, clearly, but just maybe help us kind of frame out how you're thinking about that.

So there's no question that the hyperscalers lead the demand curve here and they dominate the demand as well. But these things have very, very long tails. And I was speaking with a group just earlier, and I think 10 gig still represents a big portion of my optics business, 10 gig. And 10 gig has been around for 25 years.

And the reason that, that's the case is that what we see as hyperscalers will deploy our technology. And maybe even move to the next generation before service providers start deploying that same technology. And service providers can deploy that technology for 10 years or more. And then we'll see enterprises and commercial customers deploy our technology. And so the lifespan of that technology can be very, very long. We are at the cusp right now of 400 gig transitioning to 800 gig for service providers, but we barely touched the service provider market at 400 gig. It's penetrating now. And we haven't even begun to touch the enterprise market at 400 gig.

So these technologies are all going to have a very long curve, lifespan curve. We are moving today from 400 gig to 800 gig as you mentioned, David, in some of the hyperscalers. Some decided they were never going to deploy 400 gig, and they're only going to go start at 800 gig. And most of them have also decided they needed some 400 gig. So they've kind of backed off that view. We have some hyperscaler customers who have decided they're going to go from 400 gig to 1.6T. They're going to skip the 800-gig transition. A year from now, they may decide they need to deploy some 800 gig. So these things tend to be very fluid. But we are seeing right now a transition from 400 gig to 800 gig on the part of some of those hyperscalers, a pretty aggressive transition. And most of our growth right now is in 800 gig.

And maybe just to level set. So on the SP enterprise side, you mentioned that long tail of 10 gig. Is that on systems and optics?

Yes. It's on both. systems and optics, yes.

On both. So presumably, you have a long tail on optical systems as well despite the risk of -- I think the market is concerned that pluggables is somewhat cannibalistic to systems chassis and transponder business. How do we think about that sort of maybe trade-off between that long tail that you just mentioned where customers have these speeds 10, 15 years versus maybe SP and enterprise adopting a more pluggable architecture?

Yes. So the -- right now, the SPs are beginning to deploy the pluggable technology. I'd say beginning, we've got 400-plus customers that are deploying that, which is a good chunk of the market. But in terms of the total volume, I think we're early stage in deploying that technology. Enterprise customers historically have not deployed a lot of the optical systems. They rely on service providers to deliver that capacity. So that's really where our eyes are on what's happening with the service providers. The enterprises would be deploying switches locally and the optics associated with those switches, but not the long-reach optics that would span a city or a country.

So these technologies will have a long life. We don't expect disruptive changes on the part of any customer, even a service provider who is moving from transponders to pluggables. We can make that a very natural transition for them. It's a cap and grow. It's not a rip and replace. And so I think we're very cognizant of how those transitions are going to take place with customers.

Got it. And I know this is not your purview, but I'm going to ask it and maybe Sami chime in on pluggables, Acacia and silicon. So you've had this multiple vector from a technological innovation perspective in the last 5, 6, 7 years. How does sort of the road map of Acacia and the road map of Silicon One and what you're trying to do holistically with hyperscale customers kind of play together?

I know in the past, it was this is the Cisco solution, take it. Now it's, we're going to go to -- we're going to meet the customer where they want to be. So maybe you could speak to how the road map from Silicon One and Acacia maybe in parallel kind of lead you to where we are today.

So I can say it was December 2019, you had about the right time frame here. December 2019 that we made an announcement that we were going to support a component business model. And what we meant by that was that historically, our business model was we would sell switches and routers as fully integrated solutions, hardware, software, services, everything is in there. And that's the only business model we had for customers. If they wanted to buy something from Cisco, they bought everything we had. It was a stack of equipment.

And the hyperscalers rejected that model. The hyperscalers wanted to pick and choose the technologies or the portion of the technology that they felt was relevant for them, and they were capable of putting things together. So they largely succeeded in disaggregating the market. Hardware and software, we had SDN craze going on for a while with hardware and software separated, then even within the hardware separation of the platform from the Silicon. And hyperscalers were adamant that they wanted to pick and choose the technology. They didn't want to take everything that we had to offer.

And so in December 2019, we announced a component business model that said, if you want to buy hardware from us, we'll sell you the hardware. If you want to buy software, we'll say you the software. If you want to buy a piece of the hardware from us like the silicon, will sell you that. You want to buy an optic from us. You want to buy a DSP from us. We'll sell you that.

That was motivated in part by a desire to capture hyperscaler business more significantly. But it was also motivated by the fact that we were acquiring Acacia at that time, and Acacia had a component business model. They were selling components to their customers, and we had to adapt our systems and our processes to support that. That requires new ERP systems, that required rethinking the cash cycle, rethinking inventory, very different business model around components.

And so we worked very closely with Silicon One. Silicon One now is part of that component business model, where if a customer wants to buy our silicon and build their own white box, they can do that. We work with Silicon One on that sort of commercial model, but also in terms of timing, things like Silicon One going from 100 gig SerDes to 200 gig SerDes. Our optics, both the short-reach optics and the Acacia optics need to match that. And so we work very closely with our Silicon One teams.

I didn't ask you this the other day, but would you be open to selling other parts of your ecosystem, whether it's SerDes technology, DSP? I know there's some chatter in the marketplace by maybe one of your competitors that they're looking at that down the road as a potential opportunity.

So we do sell our DSP today. We do sell our DSP technology. Acacia is probably the example I can give you the most detail on. When Acacia came into Cisco, Acacia was selling DSPs to some customers, they were selling embedded modules, which ultimately landed on a transponder. We still sell that to customers, including hyperscalers who want to build their own. And so we will -- for anything that's a unit that we would have today, so SerDes is more of a technology that gets embedded. But certainly for DSPs, for photonic integrated circuits, we're selling those to module makers who go build an optics module and maybe we buy that back or maybe they sell that more broadly. Yes, we'll sell anything a customer wants to buy.

So I would be remiss if I didn't ask about supply chain. Cisco typically is generally considered best-in-breed. There's a lot of discussion across the ecosystem. I know it's not a big part of your BOM but DRAM, NAND, other components are in short supply. Maybe can you just give us an update on where you sit today in the context of what you communicated a number of weeks ago from an earnings perspective for the outlook for this year.

Sami, do you want to take the DRAM question?

Sure. Our updated FY '26 revenue and EPS guide does factor in some of the latest price points, at least up until our earnings report. We have two teams internally that are running these calculations and know these numbers very closely. We have a supply chain finance team, and we just have an entire supply chain and procurement arm of the company as well. So we've accounted for all these factors into the updated guide when we reported it just a couple of weeks ago.

So it's not one of those -- well, not to say that it's not something that keeps you up at night, but it's on your long list of things that you're thinking about for fiscal '26, a little bit less relevant than maybe some of the other concerns out there?

Yes. I mean we do have -- we always have supply chain gaps. We've got an army of people who spend their lives, making sure that we've got those covered. But there's nothing that's keeping me up at the moment.

So I want to ask you since you tend to be very balanced. And I don't want to cynical, but we've got this question all the time, I'm sure you get this question, and I got this at breakfast this morning. When you ship orders, when you're taking a purchase order and you ship, I think it's been publicly stated is that, that turns into a data center deployment almost immediately. How are you thinking about what hyperscalers are ordering, buildup of inventory versus deployment of said product in the context of when the market is generally concerned about maybe not a repeat of '99 and 2000, I know you lived through that as well. And maybe just kind of share with us how you're thinking about that and how you guys internally frame it and kind of hope to triangulate the dynamic.

Yes. So I lived through the '99, 2000 era. That was not a place I would want to return to. But I think a couple of differences. One is that the buyers have money. And so that's a big difference for us. The other is that -- and you alluded to this, they are deploying this capacity as we ship it. So it's not sitting in a warehouse somewhere. We still deal with very compressed cycles from order to shipment. We're not seeing -- for instance, we don't get a year of lead time with a customer. They will give us an order and expect it to be delivered within 90 days typically.

And so I would say the intervals that we're managing here are relatively short still. We have significant backlog that we have to work down. But generally speaking, customers are looking for orders to be delivered within that 90- to 120-day period.

And is the backlog related to...

Sorry, let me just also add something. So in FY '25, we were in the state of ramping up the entire AI infrastructure motion and customer engagement. And in FY '25, we recognized $1 billion of AI infrastructure revenues. We took in a bit of over $2 billion. So let's just say, 50%, right, immediate conversion. And FY '26, that exact percentage based on what we've given is more like 75%. So that's based on the $3 billion plus of revenues expected in FY '26 to ship. And then roughly double the AI orders to be taken in and that's like the at least double FY '25. So our ratios are tightening up quite a bit, and that's just one big change in FY '26 versus FY '25.

Just so -- that's a great clarification. Just to be clear. So when I think about your backlog that's both on systems and Acacia, and that is a reflection of the strength in orders from AI in '25, but there's no excess backlog in other parts of the business. It's not your purview, but there's no excess backlog sitting in routing, I doubt that, right, or Campus, right? Campus is about to go through a refresh. So this is strictly an AI-related backlog.

Yes. I'd say that's true.

Yes. And then also, where we're really building up supply to make sure we're ready and we're really building supply for our internal demand is Silicon One. So in Q4 FY '25 and Q1 FY '26, you'll see an advanced purchase commitment disclosure. Those numbers were up around 50% year-on-year in each of those quarters, and that's really a component going into our main systems. And you'll see our inventory levels haven't actually moved up as materially as those growth rates.

Maybe one more for you, Bill. When you think about what your competitors are doing with ZR, there's a lot of noise in the marketplace. A lot of investors, I think, struggle with competitive positioning, market share how to think about the growth in the underlying market, bandwidth growth, ASP offset. Maybe help level set, obviously, I think from our checks, I think Cisco Acacia has probably the biggest market share in pluggables. Correct me if that's not correct. But how are we thinking about your position with the hyperscalers? I know I think we've talked about that there's multiple hyperscalers, you sell to everyone. Maybe kind of level set like how you see the competitive landscape.

So first of all, I don't discount competitors that are -- like meaningful competitors, Ciena, Infinera, Marvell, I would consider meaningful competitors. Cisco has been, I think, leading the charge on pluggables since we did the Acacia acquisition. And for the most part, our competitors in the optical space discounted that dynamic and said, no, no, no, this pluggable thing is just going to be a niche market. We're not going to have to worry about that. Our view was and remains that pluggables are going to dominate the deployment models for hyperscalers and for service providers as we go forward, and we'll see it diminishing role for transponders. It won't be 0, but there'll be a diminishing role.

And I think that's largely played out. And now we see others sort of embracing that model, I think, more reluctantly in some cases. But out of necessity, embracing that model. We're very comfortable with the fact that we've got significant share at all of the hyperscalers. We, again, do not announce specific names, but I would say, join the club. We've been there. We're doing that right now. Others may have a need to make a more public announcement with or without the hyperscalers' permission. But we are in all the hyperscalers at this point.

And as I mentioned, we're in 400 service providers as well. So including publicly announced Lumen, Lumen has announced a new Metro network that they're building for AI, servicing AI needs and basically serving the needs of hyperscalers and carrying capacity across the country. Our architecture using pluggables is routed optical networking or RON, and Lumen called their next-gen Metro network, MetRON, which is a combination of Metro and RON. So they have fully embraced the idea of using pluggable optics for their optical infrastructure.

Great. Sami, I have to ask some financial questions. So fiscal '26, we're off to a good start in terms of your outlook. Maybe can you help us understand how you're thinking about, how Cisco is thinking about fiscal '26? What are the drivers? Because we get questions and we got a question in the room. If I look back at Cisco over the last 3, 4, 5 years, there's been great technological innovation, but growth has been a little bit maybe more difficult to come by. So how do we think about where we sit today as we think about '26 and '27, what kind of underpins your confidence next year?

Yes. The most incremental driver really to the whole company is AI infrastructure. And then behind that, there are a couple of drivers, new use case wins, working with all the hyperscale there's kind of like what Bill discussed, but also the Silicon One program. For example, we took a $1.3 billion of AI orders in Q1 FY '26, but none of those orders included P200 use case wins. And the P200 is our scale across silicon chip that's also going to go head to head with some of our peers. So there are just incremental big drivers that are coming in an area that we didn't oftentimes play in, and now we're starting to show up.

If I exclude AI infrastructure, and I look at the core, the core is really right now being driven by our Campus cycle. So about 1 quarter into the Campus cycle. That is a fairly sizable business because that includes Campus switches, SD-WAN and WiFi access points. That also will pull in security or it will pull in services. And we are 1 quarter in. And if you look at the last Campus cycle, that was around calendar year 2017 and 2018. And you saw a couple of years of very obvious cycle growth. But Campus and specifically Catalyst order growth from that original cycle going back 8 years ago, orders still grew in Q4 FY '25 and in Q1 FY '26.

And now that we've introduced the new Campus smart switches as well as new access points, we are seeing adoption of the new platforms actually outpaced prior new announcements of products of the new platforms. So the core of the company is executing and you saw some accelerated disclosures in Q1, and we just started, right? And there's also an installed base of Cat4k and Cat6k switches that we are going to eventually end of service and eventually address with the new product. So on balance, the core is actually positioned well and we have some incremental growth coming in from AI infrastructure as well.

You just touched on it briefly, but I think either Chuck or Jeet mentioned that the Campus refresh cycle is measured in years, not quarters. Is that how we should think about? So it's not going to be this rev rec spike in '26, but it's going to be more durable in '26, your fiscal '26, fiscal '27 and beyond. Is that kind of an underpinning for the next 2 to 3 years. Campus is a more -- not muted but a more balanced growth vector than the spike that people anticipate.

If we were to compare and contrast this cycle versus the last cycle, when the Cat9k was announced, that was a fairly large upgrade versus the predecessors. So you did see somewhat of a hockey stick type reaction in the order activity. This is going to be much more gradual or more harmonized is probably the better way to put it. And yes, it is a multiyear, multibillion dollar refresh. And we also believe that, everyone keeps talking about large language models that are being developed, applications that are going to be consumed on the end user side. All of this needs to go through some form of connectivity and networking. We are one of the few companies that have the chips, the data center, the security, the software, the services to enable and deploy all these capabilities. And Cisco's product portfolio was also holistically refreshed within the last 12 months. So this is a very unique positioning for the company that we really believe in.

So I've got like another 10 questions, but I'd rather ask maybe Bill or Sami, what do you think the market is misjudging or what the misperception is, Cisco has gone through an evolution in the last decade, right? To your point, 6 years ago, we went to a completely new model effectively, if you will. So what is the market missing today? I know you've executed extremely well for the last couple of years, but what hasn't resonated maybe with investors from your perspective?

Well, one thing I think is that Cisco is in my view, the candidate to basically provide -- aside from NVIDIA. NVIDIA is going to have their proprietary stack. I think Cisco brings all of the pieces together with AMD partnerships and other partnerships, our networking, our optics to really be the open stack for AI. And I think customers are going to be looking for an open solution, not necessarily a closed proprietary solution, but an open solution. And I think Cisco is the best company that's positioned to support that need that is definitely growing in the market. We've seen other examples, Broadcom is probably one, where customers sort of revolted against what looked like a monopolistic behavior. And customers are going to look for an open solution, and I think Cisco is best positioned to serve that need.

Great. I think we're about out of time. So thank you, everyone. Thank you, Bill. Thank you, Sami.

Thanks, everybody. Thank you, David.

Thanks, everyone.

Thank you, David.

Perfect. Why don't we go ahead and get started. I'm Aaron Rakers. I'm the IT hardware and semiconductor analyst for Wells Fargo. Extremely excited to have Mark Patterson here, the CFO of Cisco, company fresh off of results last week, a very good solid print. So first of all, Mark, thanks for joining us, it's really great.

Thanks, Aaron. I'm here with you and meet you in-person.

Yes, definitely, definitely better than the Zoom video, I think last week, I was in an airplane trying to do my call back with you guys. So...

Webex video, whatever.

I'm sorry. But Mark, again, I appreciate it. Maybe we'll start by just to level set. When we -- Cisco is a big company. That's clear. Broad-based portfolio. But how do you think about the biggest growth drivers for Cisco as we look out over the next 12, 24 months? And maybe we'll just double-click from there on some of those key themes that we're talking about.

Yes. So first off, I would just start with our recent quarter that we announced earnings, really strong earnings. But if you look at our order growth, if you look at it across geographies, across customer markets, if you look at technologies, everything grew. Really good balance, really good strength. So very broad-based. I would say you and I were chatting a little bit ago and I just started my 26th year with Cisco. And I would say that right now, we've probably got more opportunity ahead of us than I can remember in a long, long time, if not ever, to be honest.

So I think the big things for us right now are AI networking and AI infrastructure starting up at hyperscale, going down into neoclouds, including sovereign and into the enterprise AI opportunity as well. This big campus refresh opportunity that we spent some time talking about with our earnings call and callbacks, et cetera, is really starting to happen for us now. And then cybersecurity, if you go back -- it was just about, I guess, it's been 20 months ago now that we closed the acquisition of Splunk. And so I think we really filled out that portfolio and see that as a big growth driver for us moving into the future.

Yes. That's great. So I'll start, right, where you started, AI. Let's talk about maybe, again, remind us of what you guys have done, $1.5 billion. I think we talked about $3 billion last week on the call, very strong order growth if my memory is right, $1.3 billion. But walk us through some of those numbers. And I think what I'm most interested in is to maybe appreciate how that's evolved, right? How it's deep and how it's maybe broadened and maybe touch on that from a perspective of the web scalers, right, but also what we're starting to see in maybe enterprise and sovereign as well as far as opportunities for Cisco?

Yes, sure. So I think how it's evolved is really key because if you go back 18 months ago, I think that folks really were not -- they were not sure what Cisco's role in AI. And as you go back to the beginning of our last fiscal year, we put a target out there of $1 billion that we said we'd take in orders. And I think the reason why we really did that was twofold. One is to really just show the criticality of the technology that we sell to the hyperscalers and building of the training models, et cetera.

But the second was also just to show the magnitude and the size of the opportunity. Fast forward to the end of the fiscal year, we did just over double that target. So really good strength as we exited FY '25. I think this quarter may be an inflection point for us though. So we had a really strong start to this fiscal year, $1.3 billion, as you said, in terms of new orders that we receive just the top hyperscalers, so this doesn't include sovereign or the neocloud opportunities. $1.3 billion we said we would do by the end of the year, we gave 2 targets. We said order-wise, we would anticipate to do at least double what we did a year ago. So I think $4 billion plus anyway.

And then we gave a revenue target too, because there were also a lot of questions last year about, okay, it's great you got these orders, but when they're cancelable, when they're going to turn into revenue? And so we recognized $1 million in revenue last fiscal. This year, we said we do over $3 billion. So I think, again, a lot of momentum as you dig underneath that, we can certainly talk more about kind of where some of the strength in, but we're really seeing good strength across each one of the web scalers at this point as well.

And I always -- the question always comes up. I mean you guys -- first, to just make sure the definitions everybody understands. It's back end, just web scalers is that number, right? To your point, it doesn't include enterprise. It doesn't include sovereign, but it also doesn't include any front-end opportunity that you might see?

Yes. And what the big differentiator is each one of the hyperscalers has marked it as an AI use case specifically for us. It starts to get a little bit blurry between back and front and connecting them back to the front, et cetera, but we really just follow exactly what our customers are telling us.

And then the other vector within that is optics systems within systems, Silicon only relative to full-on systems. Can you help maybe us appreciate those mix dynamics?

Yes. So we started with a lot higher concentration of optics versus the systems. We kind of finished the year -- our last fiscal year at a higher concentration of systems versus optics. I think you're going to see that ebb and flow a little bit. The first quarter that we did, the $1.3 billion of new orders is basically half and half between the 2. We've got a very compelling optics portfolio as well as all of the systems that we're selling them are Silicon One based.

I think the big thing, too, that is really an important data point on sort of where we are with the web scalers is. What you do is you work with them to get designed in and into some use case, if you will, whether it's top of rack, leaf, spine, et cetera. And we said at our Investor Day, we had like 10 design wins in total about 1.5 years ago. But we continue to have a lot of success with the web scalers. The number is growing overall. But if you dig into that $1.3 billion of new orders that we got in Q1, you'll see that there were actually 4 different web scalers that showed more than 100% growth when you look at those Q1 orders versus a year ago.

And the fact is also we had 4 different design wins in the quarter, which will pay off in the coming quarters and years. And those 4 were across 4 different web scalers. So it's not surprising. I think that as you get in, you start to have success, you get more roles, you get more opportunities -- and we're seeing that across the broader portfolio as well. It's not just the AI infrastructure piece. If you just look at in totality, what we're selling the web scalers. We had 2 web scalers that purchased over $1 billion a piece last year. And that's the whole portfolio, if you will, cloud space as well as infrastructure.

And then I think in the past, you've talked about -- you've had 5 wins at 6 of the top -- the 6 top web scalers, right? You just mentioned 4 new ones at 4. But overall, -- that's correct, right? It's 5 out of the top 6?

Yes. We did. But just to point out, so we do business with all 6 in terms of the total portfolio, but we've talked about 5 in terms of the AI infrastructure and systems space.

And how would you characterize in the switching piece of this, appreciating it ebbs and flows, Acacia comes in, optics are strong and vice versa. But the depth of your engagement in the networks, meaning I think in the past, when I've spoken with Sami and stuff, it's been more maybe top of rack. Has that gone deeper. Any color on that?

Yes. We haven't given the specifics of all the rules, but I would say it continues to evolve and the relationships are continuing to improve. More roles are coming online. We've got products that will address both the scale out and scale across technologies now. You've seen some announcements here recently on our P200 based systems that will be available in the spring, and the optics portfolio, obviously, the long-range coherent pluggables that we have. So I'd say a lot of momentum and sort of the role that we're playing is growing in importance and scale.

Yes. Maybe I'll -- well, before I go there, you mentioned scale out, scale across. What is Cisco's role in scale up? What is their view on that?

We -- so if you notice in our investor slides that Sami so nicely put together for us, you'll see kind of a road map, if you will of Silicon One, and there's 5 product families now actually across the scale-out as well as scale across and then there's 3 different enterprise/service provider product families that we're rolling out across our entire portfolio. But scale up, we basically just said, look, we're going to be a part of that. We've not said a lot publicly yet. So I'd just say stay tuned on that front.

Yes. And part of that is the standardization the ecosystem evolving if it's [indiscernible] or some of the other things, okay. Shifting -- keeping with AI, but maybe shifting to the other piece, the enterprise and sovereign piece. Cisco has been involved, again, in your orders, right? It doesn't include HUMAIN, G42. What are you seeing in sovereign? And then -- after that, I'll ask you the same question on enterprise.

So we just talked through a lot of stats around hyperscale. And we've got material numbers that we're talking about there. So we wanted to kind of bucket that, if you will on its own. The other area that is much more nascent, but growing, as you mentioned, it's kind of neocloud, including sovereign as well as the enterprise AI piece of it. And so we gave 2 data points. And just for now, kind of collecting all 3 of those in sort of 1 bucket, if you will. Pipeline is over $2 billion now. So really ramping there and the orders are starting to ramp as well, a couple of hundred million dollars in orders that we've taken collectively across that space.

But what we said is HUMAIN and G42 and some of the sovereign builds, in fact, we just had an announcement out today with our investment in HUMAIN and the build-out that's going to begin there. We just -- what we said was, look, it's not really material to our guide this year. You'll see some ordering really start in the second half of this year, but I think the more material build outs, if you will begin in FY '27.

Okay. One of the things that I thought is interesting and very unique to the Cisco story around AI is the relationship with NVIDIA. And that's deepening I think, and you're going to correct me if I'm wrong, it has a lot to do with the enterprise adoption, this idea of bringing agenetic AI into enterprises, the network piece of the equation. Today, it's been complex. So can we talk about the NVIDIA relationship, how that differentiates Cisco? When do you maybe see that becoming an incremental driver to the story?

Yes. I think the partnership with NVIDIA is all about trying to make it as simple as possible for enterprises to deploy AI and to really accelerate that opportunity. And so you've seen 2 products from us there's a switch that we built based on Silicon One that is part of the reference architecture of Spectrum-X, and that is now available. There's also another switch that we just announced this past quarter that is going to be Spectrum-X silicon and have our software and we'll build the system. And that will be available in the spring. So again, I think well received by customers, working very well with NVIDIA, probably start to see things ramp kind of in the back half of this year. And then I think FY '27 would be a much larger opportunity for us.

Maybe shifting over to another big topic because you brought up at the beginning of the conversation, the campus upgrade opportunity, right? I mean, we talked on the call back last week about end of life, end of support the opportunity that you see. I think the company has been very pragmatic and like this isn't an inflection. It's going to be a multi-year upgrade cycle. Can you dive a little bit deeper on that, what's driving the campus upgrade cycle? How big is that opportunity? Anything you could share with that?

Yes. So as you mentioned, I think this is a -- it's a multiyear, multibillion-dollar opportunity, it's not going to hit in a quarter or a couple of quarters or anything like that. I think that you've got -- in the campus, our customers are basically saying, look, we've got equipment that's aging out, it's become a security risk for us. We need to deploy AI applications and use cases, and we need to upgrade our network posture, our security posture, the threats that are coming out of these days are more sophisticated than ever. And they really want -- I think that the fact that we've said we're going to really embed security deep into the fabric of the network is an appealing thing for them.

So you've got kind of return to office as well, and there's a number of reasons why our customers are looking to upgrade and at the same time, we had our biggest customer event in June, where we announced pretty much across the board refresh to our campus switches, which are smart switches, which incorporate AI as well as security. You can run security as well as networking processes over those. We've got secure branch routers and we've got new firewalls we've announced with new products in the data center, a new IoT products, new Wi-Fi. So pretty much across the portfolio, you've got a real refresh and probably the biggest innovation payload that we've announced in a long, long time in connection with a lot of drivers on why companies are looking to actually upgrade their networks as well.

And those drivers would be WiFi 7. You've got a large installed base that comes in to the support as well over the next...

We do -- yes, we've got tens of billions of dollars of sort of pre even Pre-Cat9K that are still installed, which again pose a security risk to our customers. I think the AI build-outs are big. If you look at agentic AI and the traffic flows that we expect associated with that, it's going to be -- it's going to put a strain on the network that we've never seen before. So again, Sami put together a slide that we showed in our investor deck that basically shows you the -- as you add agents and they're working 24/7, and their agents are working and collaborating with other agents, it's as if the number of employees on your campus or your branch are significantly more than you've had before double or even 3x depending on the workloads and work that the -- and tasks that the agents are doing. And so that's going to put a strain on the networks, and it's going to also require a lot more security to be built into the networks as well.

By the way, you brought up the Sami slide deck several times -- there's a lot of detail in that, hasn't looked through it. There's good stuff in there. The competitive dynamics in campus, right? I think everybody has talked a lot about campus upgrade cycle. You had one of your competitors recently get acquired, that create dislocation. You've got another competitor that cease campus is a large incremental opportunity for them to go after some. I'm curious of how you would describe the competitive landscape you're seeing for this opportunity?

Yes, it's always been a competitive market for us, certainly. I think if you just look at the orders, though, 13% on a global basis. If you excluded web scale from that, we've still grown 9%. So really strong growth. We feel good competitively there. We talked also about this campus refresh and how we believe it's underway. So if you look at our campus networking, which includes enterprise routing, campus switching and wireless, all of those technologies grew in the quarter quite nicely, but they all accelerated in terms of their growth in Q1 versus Q4.

And then if you dig into it also the move to the new platforms in each of those we go back and we look at prior launches and how quickly our customers actually moving to the new platform, and it's happening faster than prior launch in all 3 of those wireless routing and switching. So real good strength, and we think that the order growth kind of tells the story for us.

That's perfect. Moving again, Silicon One maybe should have been tethered to the AI, but I think it's broader than that, right? It's definitely -- we're still early earlier, maybe we're moving towards the middle innings of what the strategy is around Silicon One. But maybe just unpack that strategy, talk a little bit about Silicon One, how important it is for the company? How does that differentiate Cisco and where is it going?

So Silicon One is I would say, one of our most strategic assets that we have at the company. It is the reason, I think, are the biggest reason that the hyperscalers are looking at our technology. All the systems that we sell into that space are Silicon One space. They really like the technological advantages that it gives us the power savings, the cost savings overall. And it gives them diversity in terms of silicon as well, which I think all the hyperscalers are looking for.

As you then kind of -- and I would just also add to that, basically, when you sell them a hyperscaler, there's 2 fundamentally -- 2 areas that really differentiate you in terms of delivering value and what they really care about. And I was going to stop short of calling it a critical control point. But it's basically what they're really buying, right? One is the silicon, the other is the software. And so companies that don't have the silicon and more and more being asked to deliver open system kind of software are really not able to add a whole lot of value in the hyperscale space.

So we feel good about that. As you look at the whole portfolio then, we're -- as I mentioned earlier, we've got 5 different product families around Silicon One now that go across enterprise and public sector and service provider business by -- we've said by FY '29, all of our high-powered systems will be Silicon One base. And that gives us really 2 things -- if you think about it, one, I think more and more important today is just controlling your own destiny and your own supply chain, and it gives us much more control there. And then the second thing is we don't have the margin stacking in terms of buying somebody else's silicon. And so I think over time, it will be a tailwind for us in the gross margin area as well.

And so the gross margin tailwind, the pace of innovation, I think this is one thing I asked Chuck about last week is -- you mentioned it's a critical asset within the company. How do you think about investing into that business and keeping with...

Martin, who runs our -- Martin Lund, runs our silicon business. He's like he's first in line every time somebody asked for money and as a CFO, everybody is always asking for money and it's usually no No, no, no, no. Martin, here you are. And so there's a lot that we need to invest in there. As I mentioned earlier, we're having a lot more success with different web scalers and different design wins and to keep that going and to have different sort of tracks, if you will, and some bespoke silicon for different players and different use cases. We're going to need to continue to invest there, and this is exactly what we're doing.

So a lot of what I'm actually trying to do is kind of extract productivity and efficiency relative to AI and really get the company moving to adopt AI in a much bigger way so that you've got savings across all functions that we can then move into what matters most to make sense?

Before we go to the model a little bit because I would be remiss if I didn't ask the CFO about some model inputs. But the security business has kind of been a topical area these last couple of quarters? Can you talk about that for a second? What are you seeing as far as there fundamental changes going on given the recent performance that we saw last week, it seemed to be a key discussion point. So maybe give you opportunity to unpack that a little bit?

Yes. So what we've said is we believe this is a double-digit opportunity, kind of mid to even high teens for us over time. The big thing during this quarter, which we actually saw a decline of 2% revenue growth -- I say growth but revenue decline in the quarter, is really just the move, which is a very good thing, but the move of our customers to more of the cloud offers relative to Splunk versus the on-prem the rev rec and accounting centers basically say, if you delivered on-prem, you recognize revenue in the quarter and cloud is ratable over the life of the contract.

Now having said that, so there's a bit of a dip temporarily. It's pure timing. The health of the business is strong. If you look at product RPO, you look at product ARR, both growing double digits for Splunk. Over time, we actually find that the cloud offers are stickier. Customers are able to adopt the technology and new features a lot faster, and we'll recognize more revenue over time which is a really good thing. But it's a bit of a headwind earlier on in some of the growth rates.

The other areas of the portfolio. So there's kind of 3 big things, if you will, if you look at our security portfolio, one, Splunk, which I just talked about. The other 2 are -- we've got sort of a basket of new and refreshed technologies, really good customer adoption there with the new offers around AI defense, secure access, Hyper Shield and others. We've got now 3,000 customers, new customers across that part of our portfolio. It's only about 1/3 of the total weighting though, of our total security portfolio, but it's growing quite nicely. It grew faster in Q1 than it did in Q4. So again, good signs in terms of where we're moving there.

And then we've got a basket of kind of more, hate these more, but more legacy or sort of prior generation products. Those are declining at a slower rate. And so we're moving people to the new portfolio as quickly as we can. But those decline in a lower rate, the new refresh grew faster. So both really good there and then Splunk was really just a timing difference for us.

So that timing difference on Splunk. I mean it probably surprised you obviously, some of the Street, I think where maybe you punt the question, but where do you think that, that kind of normalizing? Is that a couple of quarters from now? Is it further out than that?

Yes. I think -- so it's a really good question. I think that first off, we want to meet customers where they are. And so as opposed to some of the competitors we have in that space, we'll offer it on-prem, where others don't have that. And that can be a competitive advantage for us. We'll continue to do that. But at the same time, I do think more are going to lean into the cloud offer and the fact that they can much more easier adapt the new features or adopt the new features and technology which again is a good thing for us. But I think you're going to start to see more of a move probably towards cloud over time, and that will be good for us overtime.

And I think to be clear on that, that's factored into the guidance, right? You got the guidance for that...

That was the big thing. I think that we wanted to really take the risk out of -- and be really clear that we don't need security to materially improve from where it is today in order to meet our updated guidance. We raised our guidance for the year $1.1 billion. And I just wanted to be very clear that like we're not counting on some big recovery there. We know it's going to take time. We have a lot of faith actually in the things that we're doing in that business, and I mentioned kind of the really good data points that we're seeing across the portfolio that should say that our growth will be improving steadily. And I think as you get into FY '27 and hopefully sooner, but it's -- the guy is not dependent on it, I think you'll start to see the double-digit growth.

And you mentioned data points. I mean can you talk about the cross-sell and call it, portfolio go-to-market leverage that you've seen with Splunk at this point?

Yes. So a couple of things. I think as you look at new logos for Splunk, and that was a big focus for us is, okay, look, between the 2 companies and the joint go-to-market, we can really drive a lot more new logos. We had 250 new logos in the quarter. We think we're on track to get to 1,000 plus for the year. So feel good about that. We've also done -- in the quarter, we did, and this was a move to cloud for us. I believe it was from on-prem to cloud, Sami, you can correct me if I'm wrong, but second largest order that we've ever taken in Splunk's history was a good -- is kind of joint go-to-market that we did and move them to cloud. And so really pleased there. We also did our largest Splunk deal ever in the last couple of quarters as well as a joint company. So we think the momentum is good there. It's just -- like I said, it's just going to take a little time.

Yes. Perfect. In the minutes I've got left, I think, again, I have to ask a CFO about the model and stuff like that. So -- there is a lot of discussion right now, as you would imagine, on components, supply dynamics, memory, cost. Can you walk us through what you're seeing? And is this causing pressures on the margin or any of the kind of headline the demand dynamics of your business that you've seen?

Yes. So certainly on everybody's mind. And also wanted to be really clear what we're seeing and what's kind of in the guide. So we are seeing, obviously, the same as everybody else in terms of memory price increases. We're also seeing some strain in DRAM and in particular, DDR4 and some in the DD5 space as well. We've factored that into the updated guide that we gave the Street. And so feel good about that. There'll certainly be things that we got to work through. We got a world-class supply chain team that will do everything that they can to get as much supply as possible. But we've factored in any risk there.

I also think that some others have talked about some lead times and risk on the silicon side because we use Silicon One and control a lot of our own supply chain there earlier. Like I mentioned, we're not seeing quite as much impact there, I guess, as maybe some others.

And then on the pricing, I think everybody always asked, "Hey, what about memory pricing? What about hyperscale, what about optic? How are you dealing with this? Is it lower margin?" And if you just look at what we're focused on and the guide we gave very similar gross margins Q4 to Q1 this year and then a similar guide Q1 to Q2 in terms of gross margin. Q4 for the year, we don't guide gross margin. But if you just look at operating leverage and the profitability of the company, bottom line is growing faster than top line and Q4, Q1, Q2 guide and then also for the full year for FY '26.

And I guess this kind of encompasses that same question a little bit that the tariff impacts, the mitigation efforts, how are you managing the pricing strategy? Have you implemented some price increases? Are you not? Because I think to your point, I mean, one of the things that's pretty remarkable about Cisco is the margin profile is very, very consistent, right, from a gross margin down to the op margin line?

Yes, the team does a great job on driving productivity improvements and doing what they can to manage the logistics and components and everything that's involved in it. And moving things from different countries to have the best strategy in terms of where we source products, where we build them, et cetera.

On the tariff front, we've just said it's not a material number to -- there's certainly obviously an impact to gross margins, but it's not been a material drag on us. We did have a component price increase or I should say, rather a price increase relative to our global price list that we put in place at the beginning of the quarter was not specific to tariffs whatsoever, but really just kind of general cost of components, logistics, et cetera, that we were seeing. And so that, I think, has really helped us and navigate some of this.

That's perfect. Government exposure, maybe we talked about that. I think it's been a little bit of a factor in getting going back to Splunk? Obviously, coming off of a shutdown. I think in the past, you've been very adamant like you are overweighted towards the good pieces, if you will, within the spend bucket of the federal government?

Yes. The defense and intelligence pieces for us are, gosh, are almost 80% of our public sector business now, so with U.S. Fed, in particular, versus civilian so less exposure to some of the areas that are seeing real heavy cuts. Q1 is our biggest quarter relative to just the seasonality and how the Fed business falls throughout the year. We saw mid- to upper single-digit growth there, just as the teams had called actually in Q1. So pretty pleased with how they executed there.

If you look at public sector for us on a global basis, it's actually been really strong outside of the U.S. So held up here nicely in Q1, and we think it will continue to do so for the rest of the year. You got to remember, we've got much easier comparison. So in terms of growth, we think somewhere in the mid -- even upper single digits is probably a good number. But then if you look at outside the U.S. in Q1, orders were up double digits. And a lot of focus on defense. And certainly, technology is becoming a bigger and bigger part of the spend of the defense budgets around the globe, particularly in Europe, you're seeing a lot of spend there. So that's been a big tailwind for us there.

So in the 2.5 minutes, I've got 2 questions left. One is the obligatory capital return. How do you think about that? You've integrated Splunk, We talked through that -- but how are you thinking about capital return versus maybe Cisco has been very acquisitive over its history, right? How do you think about balancing those 2?

So we've always said no change to this. #1 priority is just to fund the business and the opportunities that we have in front of us. Two is really to support the dividend, and we'll continue to do that. And we've also continued to increase that annually, and we'll continue to support the dividend. The third area is really on buybacks in order to give people and a better ability to plan. We've said you can count on $1 billion in terms of the run rate each quarter. And we're going to be opportunistic over and above that. Certainly, this past quarter, we bought back about $2 billion worth of stock at an average price of about $68. And so we felt like this was a good time to kind of lean in there. But you'll see us continue to do that.

Perfect. The final thing, I'm going to put an open-ended question out there. I mean when you and Sami, you're talking with investors and we think about the moving parts of the Cisco story, I'd love to just give you an opportunity to talk like what are the 2 or 3 things that you feel investors maybe either don't understand, maybe don't appreciate enough that you would leave us to kind of think about coming out of this?

So maybe a couple of things. I think -- the first thing is we all see all the news on all the circular funding, and so I'll hit on that a little bit. But you hear about the LLM, you hear about the GPUs and different companies that are making the GPUs and now TPUs and XPUs and you hear about all the power requirements, everything. One thing you probably don't hear enough about is networking. It doesn't matter whose GPU or XPU it is, you got to have networking. It doesn't matter whose LLM it is. There's networking. And so I think that the relevance of the network and the criticality of the network is significantly escalated in hyperscale and now into the enterprise as well.

I think also that there's a lot of concern here, in particular in the last few days with kind of is there an AI bubble on what's going to happen here and the numbers that are being thrown around, if you just, sort of, Lisa Su was on CNBC last week, you talked about the TAM for GPUs by 2030 being trillion. The numbers may be off of that by some order of magnitude, just if you're one that says, hey, there's a bit of a bubble here, I don't see that completely coming to the numbers that people are talking about today. But that trillion dollars, I mean, somewhere between 10% and 20% of that is typically the networking spend that would be associated with that. So even if that were to come off, by an order of magnitude, there's a ton of opportunity for us, in particular. So I think that's probably a couple of things that maybe aren't quite as well understood.

Perfect. Mark, thank you so much. appreciate it.

Appreciate it. Thanks.

That's great. Okay.

Welcome to Cisco's First Quarter and Fiscal Year 2026 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.

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. 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-over-year basis.

Please note that our discussion today will include forward-looking statements, including our guidance for the second quarter and fiscal year 2026. These statements are subject to risks and uncertainties detailed in our SEC filings, particularly in 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.

Thanks, Sami. And thank you all for joining us today. We had a strong start to fiscal '26 with Q1 revenue and earnings per share both coming in above the high end of our guidance ranges. We delivered record Q1 revenue, putting Cisco on track to deliver our strongest year yet as indicated in our guidance for the full year.

In Q1, total revenue increased 8% year-over-year with product revenue up 10%, driven by robust demand for our AI infrastructure and campus networking solutions. Our strong top line performance, combined with operating efficiencies and solid execution by our teams contributed to non-GAAP EPS growth of 10% as we continue to grow earnings faster than revenue. We delivered solid margins and cash flows, allowing us to return $3.6 billion in capital to our shareholders through dividends and share repurchases, representing 125% of free cash flow in Q1. Additionally, we generated solid growth in annualized recurring revenue and remaining cornice obligations, both of which continue to provide a strong foundation for our future performance in FY '26 and beyond.

Cisco's strong start to fiscal '26 as a testament to the critical role of secure networking and the strength of our portfolio as organizations look to deploy AI across their businesses. That said, we know many customers still have a lot of work to do to ensure they have the modern, scalable, secure networking infrastructure to support their AI goals.

According to our 2025 global AI readiness index, only 1/3 of organizations fill their IT infrastructure can accommodate the needs of their planned AI projects, which creates a massive opportunity for Cisco. With our industry-leading networking portfolio powered by Silicon One, AI native security solutions and operating systems, we are well positioned today to provide the critical infrastructure for the AI era.

Now let me comment on the strong demand we saw in Q1. 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 FY '25. Demand from telco customers was also strong in Q1 with orders growing more than 25% year-over-year.

Now some color on demand from a product perspective. Networking product orders accelerated to high teens growth in Q1, marking the fifth consecutive quarter of double-digit growth, driven by hyperscale infrastructure, enterprise routing, campus switching, wireless, industrial IoT and servers. Within our campus networking portfolio, we are seeing very strong demand for switching, routing and wireless products, indicating that enterprise customers are investing in the connectivity needed for AI deployments. As early catalyst switching generations like the 4K and 6K near end of support, we see growing demand for our Cat9k series. Additionally, all of our next-generation solutions, including smart switches, secure routers and WiFi 7 wireless products are ramping faster than in prior product launches. This marks the beginning of a multiyear, multibillion-dollar refresh opportunity.

We're also seeing consistent progress across our industrial IoT portfolio including new ruggedized equipment with orders growing more than 25% year-over-year in Q1. We expect this demand to increase driven by onshoring of manufacturing to the United States, the increase of AI workloads at the network edge and the emergence of physical AI. AI infrastructure orders taken from hyperscalers in Q1 totaled $1.3 billion, balanced between Silicon One Systems and Optics. Marking a significant acceleration in growth and demonstrating our strength for advanced AI use cases. We expect to recognize roughly $3 billion in AI infrastructure revenue from hyperscalers in fiscal year '26.

As these hyperscale customers look to extend AI clusters across their infrastructure, we see robust demand for Acacia's market-leading coherent pluggable optics, offering significant cost and power savings. All hyperscalers are now customers of these products. In Q1, we also announced our latest Cisco [ 8223-router ], powered by our [ Silicon P200 ] chip. This first-to-market 51.2 terabits per second fixed Ethernet routing system is designed for the intense AI workload traffic between data centers. With Silicon One's unmatched scalability, power efficiency and programmability, we can provide the performance and speed across data centers that would have previously only been possible within a data center with a switching infrastructure.

Demand for Silicon One continues to grow, and we expect to ship our 1 millionth chip in Q2 of fiscal year '26. Product orders for AI use cases beyond hyperscaler training are also gaining traction with orders for data center systems, including switching and compute, growing double digits in Q1 as customers prepare their networks for inferencing and agentic workflows. We see a growing pipeline in excess of $2 billion for our high-performance networking products across sovereign, neo-cloud and enterprise customers. To capture this opportunity, we continue to make progress both within our own portfolio and across our strategic partnerships.

We recently announced an expansion of our partnership with G42 in the UAE to power, connect and secure G42's large-scale AI clusters featuring AMD GPUs. Other strategic partnerships in the region, including HUMAIN and Stargate UAE, are progressing as planned. We also launched our sovereign critical infrastructure portfolio for European customers to operate in their own air gap on-prem physical environments. This includes our networking and collaboration products, enhanced by security and observability.

In addition, Cisco announced an expansion of our NVIDIA partnership and our new N9100 switch based on Spectrum-X silicon. We are now the first NVIDIA partner to offer networking compliant with their cloud reference architecture. The N9100 available in the second half of fiscal year '26 will provide the operational consistency and flexibility needed for sovereign and neo-cloud providers to build and manage AI at scale. We are also delivering new capabilities and features for Cisco Secure AI factory with NVIDIA announced in Q3 of fiscal year '25. These advancements strengthen our commitment to high performance, secure and trusted AI infrastructure globally. We expect Cisco's AI opportunity across sovereign neo-cloud and enterprise customers to ramp in the second half of fiscal year '26.

Now shifting to security. We continue to see order growth for our new and refreshed products which comprise around 1/3 of our security portfolio and includes secure access, XDR, Hypershield, AI Defense and our refreshed firewalls. Nearly 3,000 customers have purchased a new product since launch, and we saw mid-teens growth in demand for our next-generation firewalls in Q1. This growth was partially offset by a decline in our prior generation platforms. We continue to see strong performance from Splunk, closing one of our largest Splunk deals to date in Q1 enabled by joint Cisco and Splunk sales engagement. Splunk's ARR and product RPO grew double digits as we saw a notable change in how customers consume Splunk offerings in Q1 with a shift to more cloud subscriptions and fewer on-premise deals.

Revenue for cloud subscriptions is recognized ratably, whereas product revenue for on-prem deals is recognized on delivery. While this shift negatively impacted security revenue growth in Q1, it is purely a timing issue. We are actually pleased to see more cloud subscriptions for Splunk as they enable greater adoption and expansion and allow us to deliver innovation faster to enable customers to unlock value from AI.

Now let me comment on some of our recent innovations. As we look at the AI opportunity, we see customer use cases growing across training, inferencing and connectivity with secured networking increasingly critical as workloads move from the data center to end users, devices and agents at the edge. As mentioned last quarter, agents are transforming network traffic from predictable bursts to persistent high-intensity loads with Agentic AI queries generating up to 25x more network traffic than chatbots. Instead of pulling data to and from the data center, AI workloads require models and infrastructure to be closer to where data is created and decisions are made, particularly in industries such as retail, health care and manufacturing. This is why we introduced Cisco Unified Edge last week, an industry-first converged platform for the network edge, integrating compute, networking and storage into a single system. Unified Edge enables real-time inferencing for agentic and physical AI workloads, so enterprises can confidently deploy and manage AI at scale.

We also announced Cisco Data Fabric in September. A Splunk powered architecture to unify and manage machine data across various sources, allowing enterprises to build AI models with their previously unused proprietary data. As always, these innovations are designed to further Cisco's platform advantage where every new technology investment compounds the value of a customer's existing investment.

To summarize, we are seeing strong demand across all customer markets and geographies as well as expanded opportunities as our customers power their AI use cases from the data center to the edge. We continue to innovate at unprecedented scale to build AI-ready data centers, power future-proof workplaces and create a foundation of digital resilience. And our strong performance is fueling our capital allocation model, returning significant value to our shareholders while positioning our business for Cisco's strongest year yet in fiscal '26 as indicated in our guidance.

Now I'll turn it over to Mark for more detail on the quarter and our outlook.

Thanks, Chuck. 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.

For the quarter, total revenue was $14.9 billion, up 8% year-over-year. Non-GAAP net income was $4 billion, up 9%, and non-GAAP earnings per share was $1, up 10%, demonstrating continuing operating leverage with non-GAAP earnings growing faster than revenue.

Looking at our Q1 revenue in more detail. Total product revenue was $11.1 billion, up 10%, and service revenue was $3.8 billion, up 2% year-over-year. Networking was a standout with growth of 15% with strength across the portfolio, led by high double-digit growth in service provider routing, which was largely driven by revenue from AI infrastructure. Data Center switching and enterprise routing also contributed double-digit growth in campus switching had growth in the high single digits. Security was down 2%, reflecting declines in prior generation products and a shift to cloud subscriptions in our Splunk business that Chuck referenced, partially offset by growth in Secure Firewall, Duo and SASE. Collaboration was down 3%, reflecting declines in devices and WebEx. Observability was up 6%, primarily driven by growth in ThousandEyes.

Looking at our recurring metrics. Total RPO was $42.9 billion, up 7%. Product RPO grew 10%, of which the long-term portion was $11.8 billion, up 13%. Total ARR ended the quarter at $31.4 billion, an increase of 5% with product ARR growth of 7%. Total subscription revenue was $8 billion and represented 54% of Cisco's total revenue. Total software revenue was up 3% to $5.7 billion. Q1 product orders were up 13% year-over-year. Product orders were up across all geographic segments, with the Americas up 16% and EMEA up 8%; and APJC up 13%. Product orders were also up across all customer markets with service provider and cloud up 45%, public sector up 12% and enterprise up 4%.

Total non-GAAP gross margin came in at 68.1%, down 120 basis points year-over-year but coming in slightly above the midpoint of our guidance range. Non-GAAP product gross margin was 67.2%, down 170 basis points, driven by negative impacts from mix and pricing, partially offset by productivity improvements. Non-GAAP services gross margin was [ 70.7% ], up 40 basis points. We continue our focus on enhancing profitability and driving financial discipline. With non-GAAP operating margin at 34.4%, above the high end of our guidance range. Our non-GAAP tax rate was 19% for the quarter.

Shifting to the balance sheet. We ended Q1 with total cash, cash equivalents and investments of $15.7 billion. Operating cash flow was $3.2 billion, down 12% due to investments to meet growing customer demand for AI infrastructure. From a capital allocation perspective, we returned $3.6 billion to our shareholders during the quarter comprised of $1.6 billion for our quarterly cash dividend and $2 billion of share repurchases, with $12.2 billion remaining under our share repurchase program.

To summarize, we had a solid start to fiscal 2026 with top and bottom line performance exceeding our expectations, driven by strong order growth and margins all demonstrating the power of our innovation engine to drive strong top line growth as well as operating leverage to fuel profitability. 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. Please note our Q2 and fiscal year 2026 guide assumes current tariffs and exemptions remain in place through the end of fiscal 2026. These assumptions remain unchanged from our prior guidance with the exception of the [ China fentanyl ] tariff being reduced from 20% to 10%. Looking ahead, you can expect us to continue our focus on durable growth with financial discipline, driving operating leverage and continued capital returns.

For fiscal Q2, our guidance is as follows: we expect revenue to be in the range of $15 billion to $15.2 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 33.5% to 34.5%. Non-GAAP earnings per share is expected to range from $1.01 to $1.03. We are assuming a non-GAAP effective tax rate of approximately 19%. For fiscal year '26, our guidance is as follows: we expect revenue to be in the range of $60.2 billion to $61 billion. Non-GAAP earnings per share is expected to range from $4.08 to $4.14.

Sami, let's now move into the Q&A.

Thank you, Mark. [Operator Instructions] Operator can we move to the first analyst in the queue.

Aaron Rakers with Wells Fargo.

Congrats on the quarter. I guess I want to dive a little bit deeper into the AI orders, obviously, tracking to, I think that was a $3 billion number in fiscal '26 from the web-scale vertical, so maybe start there. As we think about the diversity that Cisco is seeing in the web-scale opportunity, how has that evolved? And have you guys been engaged in deepening kind of super spine or even scale across opportunities in the web-scale vertical?

And then as a follow-up on the enterprise side, I think the number was $2 billion pipeline, I think the slide deck says $200 million versus last quarter. How do we expect that to progress through this fiscal year?

Thanks, Aaron. So let me -- I want to just clarify the $3 billion number that we gave out was a revenue number from the hyperscale AI infrastructure in the fiscal year. I would say that the $1.3 billion was -- were new orders that we took during the quarter from the same customers that we measured last year, and it's the same products that we measured last year. So it's clearly -- it's definitely apples-to-apples, first and foremost.

What we expect from an orders perspective this year is that we will -- we're expecting at least 2 times the orders that we received in fiscal year '25 from that same set of customers. So we see a lot of solid pipeline throughout the rest of the year. And the use cases we see it expanding. Obviously, we've been selling networking infrastructure under the training models. We've been selling scale out. We launched the [ P200 ] base router that will begin to address some of the scale across opportunities. We clearly have seen great success with our pluggable optics. All of the hyperscalers now are officially customers of our pluggable optics. So we feel like that's a great opportunity. They not only plug into our products, but they can be used with other companies' products with our competitors or white boxes. So that's been good. We've also begun to see inferencing use cases where we're also winning there.

I'd say the other thing that we saw in Q1 is that we had 4 of the major hyperscalers who grew triple digits during the quarter, and we had 4 meaningful use case wins during the quarter. 1 from each of those 4, so across 4 different hyperscalers. So the momentum continues with the silicon.

Your second question relative to the enterprise, what we said was that the neo-cloud sovereign cloud enterprise pipeline, basically for the rest of our fiscal year, for the next 3 quarters, exceeds $2 billion. We booked $200 million in Q1 and so that provides incremental opportunity for us as we look to the future, and that's through the end of our fiscal year.

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

Meta Marshall with Morgan Stanley.

Maybe just following up on Aaron's question. Just in terms of kind of some of that strength that you're seeing, is the kind of upside that you're seeing to some of these AI orders coming from kind of scale across strengthening? Or is it just coming from deepening engagement because I guess our view is that scale across has strengthened throughout the quarter. So just kind of want to get a sense of if that is something you've picked up on as well.

And then just as a follow-up question, just any commentary around DRAM pricing has certainly become more elevated? Just how you guys are thinking about that in terms of the gross margin?

Thanks, Meta. I would say that the scale across opportunity is emerging, and we obviously announced the 51.2 terabit router that will help us go after that opportunity. I'd say, in general, most of what we saw in Q1 was just a deepening of existing use cases. We want the 4 new ones, but candidly, there wasn't a ton of new orders from them during the quarter. So those are all yet to be recognized. But we think the scale across opportunity will continue to grow and evolve. And again, we saw pretty meaningful acceleration in pluggable optics, which is a really solid business for us and gives us yet another opportunity to pursue with these customers.

On the DRAM question, Mark, I'll pass that one to you.

Yes. So I would just say across memory as well as PCB and Optics we've noticed a bit of a tightening of supply. On the memory side, we've seen what you all have all seen as well, and that's pretty significant price increases as well. Both of those in terms of the supply as well as the pricing, though are both included and considered in our updated guide for the Q2 as well as the year.

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

Tal Liani with Bank of America.

Hello. Great quarter. It's hard for me to ask a tough question in a great quarter, but I'm going to do it anyway with your permission. If I remove $1 billion from last year revenues, which were the AI back end and I removed $3 million from the guidance for next year. The rest of the business, which is the majority, [ $55 billion ] base for last year is only growing 3.6%. Why don't we see greater growth with what we have in WiFi and campus. And security, why don't we see more than 3.5% growth for the rest of the business?

Tal, it's a good question and you're always allowed to ask tough ones. So I'm just going to point out on the orders front for Q1, and then I'm going to let Mark talk a little bit about the P&L.

Just to be clear on the -- if you normalize out the hyperscaler growth in Q1, the rest of the business grew 9% from an orders perspective. So that's not a data point we've given you, I want you to have that. And then Mark, do you want to touch on.

Yes. Thanks for the question, Tal. I would say we're 90 days into the year. We've got a very good start, as you've seen in the order growth rates and the momentum that we're building. But as we get into the second half of the year, we're seeing much more difficult comps. I mean, the comps in Q1, Q2 a year ago were minus 6 and plus 9. The comps as you get into Q3 and Q4, plus 11 and plus 8 on the top line. So much tougher comps there, but I do follow your math, and that sounds about right.

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

Ben Reitzes from Melius Research.

Chuck, I wanted to talk about one of your comments around the multiyear nature of the cycles. I know you guided for the year. So I mean, we're good with that. But can you just elaborate a little bit more on that? What are you seeing that gives you the confidence to talk about multiyear cycles? Maybe highlight the key ones you're thinking about a little more? And what made you say that comment which was particularly interesting.

Yes. Thank you, Ben. I think when we look at the refresh opportunity. If you recall, we announced a new suite of products in our enterprise routing space. We announced new WiFi 7 portfolio and we announced a new suite of campus switches. And what we saw is we -- I think if you think about the Cat4k and the Cat6k installed base that's coming to end of support, that's one factor that's driving it. We saw -- as we ramp this launch of these new products, all 3 of those product families are ramping faster than they have in historical launches. So that leads us to believe that the customers are actually aggressively moving on this.

And I think the other is that the -- it indicates that customers are still very focused on modernizing their network infrastructure in the enterprise in preparation for inferencing and AI workloads. And so -- but it's -- these things are always multiyear Ben. When we launched a Catalyst 9K in 2017. And I mean that transition just kept going for 5, 6, 7 years. And so that's just typically what we see when these things move and the fact that they're growing -- they're ramping faster than what we've seen in the past would indicate there's a lot of interest in this portfolio.

The last thing I would say is that these new switching platforms, which truly enable security to be fused deeply into the network. It is a message that's resonating with our customers, particularly as they look to agentic workflows in the future. They realize they can't orthographic off to a firewall. They're going to have to be applying security policies in the network as the traffic moves. And I think that's another consideration that they're preparing for.

Thank you, Ben. [Operator Instructions] Michelle, we can move to the next analyst.

James Fish with Piper Sandler.

Good stuff on the networking side. I guess, how for long or what's the penetration of Silicon One into the product portfolio now? And as a stand-alone product, what are you guys seeing as why Silicon One starting to gain some of that traction with the hyperscalers and what it can do versus the custom solutions that are being talked about as well as Broadcom's latest chips?

And just as a follow-up, why is it now that Splunk is starting to see some of those greater shifts to cloud at this point? And any sense of the impact it had on the security number this quarter?

Yes, Jim. So on the Silicon, we are -- we think -- by the end of fiscal '29, so we think in another 2.5 years, we'll have that fully rolled -- we'll have Silicon One fully rolled across the entire portfolio. So that's the intent. It's in some of our data center switching products going to the enterprise, it's obviously in the hyperscaler products. And I think it's a combination of performance, programmability and low power consumption. And our -- and I think the other thing is that they just -- they enjoy having multiple sources, and they really enjoy the custom engagements that we have with them to really look at their unique requirements for each. I think that is -- that's really what's changed the trajectory for us with these customers. And I mean, for those of you who are on these calls 5, 6, 7 years ago, you remember I kept telling you that we hadn't done well here. We hadn't done well here and our intent was to do so. And I'm really proud of what the teams have accomplished.

On the security stuff, Jim, I'm glad you picked up the revenue issue. As I said in my prepared comments on Splunk, and then Mark, I'll let you talk a little bit about the implications. But we just saw a pretty meaningful mix shift during the quarter to cloud. I think the prior quarter, it was somewhere roughly 50-50, and I think it was down to -- the on-prem was only about 1/3 of the revenue. So we expected more of a 50-50 kind of mix because that's what we had seen. And at the end of the day, it's actually quite positive, as I said, because it allows us to drive adoption with our customers' expansion as well as deliver innovation real time because it's cloud tethered.

So from a long-term perspective, it's good. In the quarter, it was obviously a onetime timing issue on the revenue front. If you look at all the dynamics on the order side, things are generally the way they were the prior quarter. We saw positive order growth in our new and refreshed products. We saw the same drag from our prior generation products, although that number is getting smaller. And then we saw double-digit ARR, double-digit RPO on the product side as it relates to Splunk. So on the demand side, there's not a lot to worry about. We just had the onetime revenue issue associated with this recognition with the 606 accounting.

So Mark, anything to add.

Yes. So if you look at this transition that we're seeing on the Splunk side, as you mentioned, Chuck, it's a good thing. Despite the timing difference that we're -- you will see based on ASC 606 and the revenue recognition based on on-prem versus cloud, we expect to actually recognize more revenue over time. So when we look at the cloud offers, they're stickier than the on-prem offers. Customers are actually able to adopt the technology faster, adopt features, et cetera. And so it's a good thing.

What you are seeing in, I think, a better measure of the health of the business at Splunk as we really look at ARR and RPO, both of those grew in the double digits for the quarter. So again, while we're disappointed with the timing a little bit in the quarter, overall, it's actually a really good thing for us.

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

David Vogt with UBS.

One, maybe just to start, just to pivot the campus, I think in the deck in your prepared remarks, you talked about the next-gen solutions ramping faster than prior product launches. Can you kind of give us a sense for like what's driving that? Is it a competitive -- is it just better for competitive products? Are you seeing disruption from some of the smaller players, like #2 and #3 in the marketplace given sort of the dynamics in that sort of integration there? Just more color there would be helpful.

And then along those lines, maybe when you think about sort of the campus market, I do know you mentioned in the prepared remarks, there's a lot of end-of-life product out there. How do you think about that as it relates to sort of some of those customers, I think, are government customers is not public sector customers put in the context of what's going on actually in D.C. right now. So is that part of the strategy going forward, just to upgrade those as many starts to free up and get this first? I'm just trying to marry the 2 sort of markets here, both campus and government, kind of what's going on there?

Yes. Thank you, David. I'd say on the campus, it's a lot of what I said before. I think it's the sales stuff, the Cat4k, Cat6k older WiFi, and so we see in these early days of it, we see slightly faster adoption than we've seen historically with these launches.

As it relates to #2 and #3, there's clearly been some confusion in the marketplace, particularly around WiFi. We've been talking about that for several quarters. And so I think that's been positive for us. I can't give you any specifics relative to whether that's a big part of it now.

And the other 2 things I think they're driving it are AI preparation and this belief that security does ultimately have to be in the network, and we're the only ones who have both security and networking. You've seen some of our competitors announce partnerships with security vendors. And those are hard to pull off. I mean, it's hard to get the level of integration you're going to need to have when you don't own each of the technologies. So we feel like we're well positioned there. So we think all of those things are having an impact on various customers.

As it relates to the government, we were pleased last quarter that our U.S. federal business, despite the shutdown grew high single digits. From an orders perspective, we thought that was quite positive. We're optimistic that the vote happens today and that the government reopens, and we don't have to talk about this much more. But as it relates to the end of support stuff that happens to be in the -- particularly in the federal government, there is a lot of discussion and a lot of pressure beginning to build on ensuring that, that equipment gets updated just from a cyber risk perspective and a hygiene perspective. So we would expect that there'll be some upside from that as they get back and begin working again and reopening the government.

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

Samik Chatterjee with JPMorgan.

Chuck, maybe both questions on the AI front itself. Firstly, on Optical, you talked about the strong growth you're seeing in Acacia. Could you just talk about optical more broadly in terms of the demand you're seeing inside the data center versus outside the data center in terms of like pull-through from scale across, et cetera? And what -- how you -- how is Cisco is participating in both of those aspects?

And then for the follow-up, for the I heard you say twice the number of orders in terms of AI orders from the same customer group in fiscal '26 and the sovereign customers, it looks like you are progressing on the engagement, but haven't seen orders as much yet. So that would be sort of upside to that number? I just wanted to clarify that the sovereigns aren't included as those orders come through that sort of $4 billion number that you're highlighting for [indiscernible].

Yes, Samik, thank you. On the optic side of AI, we're participating in both. We're blessed to have great solutions in both inside the data center and then outside the data center DCI scale across, I think we'll -- and we'll continue to innovate there. As I said, we now are selling our pluggable optics to the -- all of the hyperscalers, all the major hyperscalers. And I think that we'll continue to have -- we'll continue to see great opportunities across both of those. And again, it's a really large market that is meaningful even on par with sort of the switching side of it. So we're pleased to be on both sides of it.

On the order front, yes, what my comment was is that we expect this year that we would be at least 2x the orders that we saw from the hyperscale customers last year, and that's the same products that we measured last year and the same customers that we measured last year. So no change.

On the neo-cloud, sovereign cloud enterprise, there's those -- that upside where I said we had $2 billion plus of pipeline for the balance of the year. None of that is included in that 2x number that I quoted. So you had that exactly right.

And maybe just to add, Chuck, on the sovereign side, the early phases of the sovereign build-out are really not material to this year's guide as well.

Yes. And I would say that, as you all know, Samik, the there's export licenses have to be attained in many of these cases. And so we're still working through that, and it's -- so we expect most -- some of that stuff will really start flowing in probably the second half of our fiscal year. But to Mark's point, it's not a material part of the guide this year.

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

Michael Ng with Goldman Sachs.

I just have 2. First, the G42 partnership, it looked like it was a full rack solution using AMD chips. I was just wondering if you have some sort of kind of preferred partnership with AMD? Should we see more of that as we head out through the year? And how important is that combination of compute and networking as rack solutions potentially get more important?

And then second, I wanted to ask about some of the channel partner program changes that are supposed to kick off next year. Any feedback or comments just on the drivers of that change and what you expect to be the result on the business going forward?

Yes. Thanks, Michael. On the -- we're really pleased with the G42 partnership. I was over there again a couple of weeks ago. And you're right, the first announcement is with AMD. And I would say what we believe is that there are going to be multiple GPU providers, particularly in the world of inferencing, you're going to continue to see an expansive portfolio of GPUs and [ XPUs ]. And what we want to do is participate as a connectivity layer across as many of those as we possibly can. And so that would -- we work very closely with AMD. We've been very close with them on the G42 opportunity, and we continue to talk to them about other opportunities that are occurring around the world. So my anticipation is we'll have as many ecosystem partnerships as we possibly can.

On the partner program, I'll make some comments on it, Mark, if you want to -- because I actually -- most of you know that 25 years ago, I helped build the program in our partner and build our partner strategy. And I think that what this really is, is it's a recognition of the growth opportunities ahead of us and how to align our programs so that -- our teams are incented, our partner teams are incented in the same way to go after these growth opportunities that we see in the future. And I'd say we had our Partner Summit last week, our annual Partner Summit and the partners were generally positive. We've launched tools to help them assess the monetary impact of the new program versus their old program? Does it get better? Does it hurt you? And if it's hurting you, how can you adjust your sales strategy or your go-to-market strategy to actually increase your performance in the program.

And I think we have a new worldwide partner leader, [ Tim Kogan ], who is very well trusted by the partners, they know them really well. And every time we do one of these major changes, we know there's a reasonable chance that we missed something along the way, and our commitment to them is that if we miss something, we'll fix it. And we've got a long history of doing that. And so I think, in general, the partners feel pretty good about it, and they feel good about the fact that we're going to continue to adapt the program to make sure it drives our growth priorities and helps them have a profitable journey alongside us.

Yes. Chuck, maybe just to add 3 things. I think one, the new partner program is really about simplification. We've had a number of different rewards and incentive programs, just really tried to streamline that and bring that together.

Secondly, the new program rewards partners for not only portfolio breadth, but the depth of expertise. And I think that's a really important thing. And then lastly, it gets some laser focused on what really matters, what truly matters. And that's campus refresh, AI, security and then premium services. So all in all, I'd say, while there's always some concerns, as you mentioned, whenever you do something new, I think it's being accepted quite well.

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

Amit Daryanani with Evercore ISI.

I have 2 as well. I guess, post on the $3 billion of AI sales in fiscal '26 that you just talked about is there a way to think about how much of that do you think is Optics versus Systems? And do you see the overall margin of AI really being comparable to the corporate averages? That's the first one.

The second one, Chuck, security revenue was down 2%, and I thought I hold you on the legacy pressure and the mix shift that you've also had on the cloud side. Could you just talk about what do you think normalized security growth could look like once this mix stabilizes? I'm just trying to square that against the prior guide of mid-teens you've had on the security side, that would be helpful.

Yes. I'm going to let Mark take the revenue and the margin one, then I'll come back to the security one, Mark.

Yes, happy to. So when you look at it, certainly, we've got a broad portfolio and a range of margin, if you will, across. And we've always had that, whether it's across geographies, it's across technologies that we sell, it's across customer markets, et cetera. I think what you're seeing right now is strong margins, 68.1% for Q1. We're pleased with that.

In the guide that we gave you as well, you can see that both Q2 as well as the full year for '26 that we're expecting to grow the top line faster than the -- sorry, the bottom line faster than the top line. So a real focus on leverage and profitable growth, if you will. And I would just tell you that optics web scale service provider or true enterprise core portfolio, et cetera, that's all part of the mix and all part of the guide that we gave you.

And then, Amit, on the security front at negative 2%. Yes, we -- first and foremost, I just want to reiterate, we still are committed to the mid-teens long-term guide on revenue for security. I've talked a lot about the fact, and by the way, none of us are happy about where we are right now. Let me be clear about that. But I think we think that it will continue to accelerate through the year and it will come out of the year at a much higher rate. And then I think the normalization of this sort of mix shift is probably going to take us 4 quarters to get to where the year-over-year comparisons are sort of apples-to-apples on the mix side.

So that's how I think about it. We're going to just give you as much transparency as we possibly can. The other thing I would tell you is that we don't need security to materially improve from here to hit the guide for Q2 or the year that we've given you. We sort of baked that in.

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

Karl Ackerman with BNP Paribas.

I have 2 as well. For my first question, I guess, Chuck, how much of the incremental $1 billion in revenue in fiscal '26 is coming from an earlier-than-expected enterprise campus refresh versus AI growth?

And then separately, for my follow-up, maybe for Mark, have you been able to secure enough capacity or are you constrained in any way from fulfilling a doubling of AI orders among hyperscale customers this year?

I am on the first one, I think you're referring to the incremental $1 billion being the increase in our guide from last time on the year. And I'd say it's a combination of those 2 things. I mean if you look at the hyperscale growth and orders is certainly going to be meaningful. But when you look at the larger business that we're talking about that was -- orders were up 9% in Q1. I think it'd be a mix. I don't know that we have an exact number Mark to go through and you want to take a...

We're seeing strength clearly on both sides. Yes, and as far as whether we've been able to secure sort of the capacity, if you will, in the supply. If you just look at -- we always think the best measure is to look at sort of inventory plus advanced purchase commitments on a combined basis. If you look at that for the quarter, just in the last 90 days, we're up almost $1 billion. And year-over-year, we're up 38%, about $3 billion plus. So we are making those advanced purchase commitments and making sure that we can secure the supply and the inventory that we need to meet the accelerating demand that we're seeing in hyperscale.

Thank you, Karl. Michelle, can we take the next analyst.

Antoine Chkaiban with New Street Research.

I'd love to follow up about Cisco Unified Edge. How large do you think that opportunity can be relative to the large-scale multi-gigawatt cloud data centers and I think you mentioned use cases in retail, health care, manufacturing, if you can double-click on each of them? And what's the preferred deployment strategy for Edge AI Compute. Do you think that's more an opportunity for players with Edge assets like CDN or operators? Or do you think that's more something enterprises will deploy on-prem.

And maybe as a follow-up, so is Cisco planning to participate to the scale-up opportunity? And will that be material? And what partnerships would you be forming to do that?

Thanks, Antoine. So yes, the Unified Edge product is something we're really excited about. As we all know, when you're really trying to do real-time inferencing, in a retail environment when a customer is there, and you're trying to learn something or gain very critical information at that moment in time, you're going to have to push that inferencing to the edge and you can't send the data back and forth to a data center.

So we think this Unified Edge over time is going to have huge applicability, retail, restaurant chains, health care and it's a unique thing that we can put together because we own all of those technologies. And so I'm proud again of the team for coming across -- coming together across all of our business units and actually seeing the need to deliver that product and delivering it. We'll see how it scales and ramps but I think it's something that's going to be very interesting to our customers. Years and years ago, we had branch solutions that had integrated compute, et cetera, and integrated security. And I think this is sort of is the revitalization of that kind of technology at the edge.

From a deployment strategy perspective, I'd say it's all of the above. I think you could see CDN players. I think it is something that hopefully, the carriers and the telcos who have these distributed [ POPs ] that are very close to these customers can offer this as a consumption service. I think customers will also choose to put it on-prem. In certain cases, every customer has a different perspective.

If I go to your second question on the scale-up opportunity. If you look at the slide that we had in our prepared notes on our Silicon One road maps, we did have a scale-up silicon offering on the right side of that slide. So we have talked a bit about our future ability to participate in a scale up. We do believe that that's going to transition to a version of Ethernet. And it's our intent to play in that market. So you should expect to see something from us over time, for sure.

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

Simon Leopold with Raymond James.

I've got the 2 as well. One is, I want to understand what's sort of motivating the customers in this campus refresh. And where I'm coming from is we had the sort of backlog flush after the pandemic. So 2023 was a phenomenal year for your campus business. And so I assume the embedded base is relatively young. So help me understand sort of the motivation or why you're succeeding here?

And the second question is, we've heard that other governments, international governments, state and local governments have picked up more of the slack with the federal challenges you saw earlier this year. Could you unpack what you're seeing, particularly on the international governments?

Yes, Simon. So on the campus side, I think the reality is that I think the size of that installed base and how much of it was actually flushed in 2023 is probably overestimated. I mean it was a big move, granted. But if you look at the amount of end of support equipment that our teams have identified, it's billions and billions and billions of dollars of installed base that is pre Cat9k. So not only it didn't get an upgrade to the Cat9k, it didn't get upgraded in the 2023 push. So all of that is still out there, and I think that's part of what we're seeing.

On the other government front, we see dynamics in Europe where, from a defense perspective and from a geopolitical perspective, we see lots of investment happening in public sector in Europe. We see it in the U.K. and Germany. We obviously saw U.S. Federal growing strongly even though it was closed. The government was closed, but public sector globally has been strong for several quarters in a row, and we anticipate that given the push for general sovereignty around the world, not just data sovereignty and tech sovereignty, but overall sovereignty, we would expect that to continue.

Yes, Simon, I would just add to your point, I think you were alluding to this. All 3 of our geographies grew in public sector, but the bulk of the strength or the greatest strength that we saw was actually outside the U.S. And kind of in the mid to upper teens in EMEA and APJC. So good strength there.

Thank you, Simon. Michelle, can we move to the last and final analyst in the queue.

Thank you, sir. Ben Bollin with Cleveland Research.

A bigger picture question for you, Chuck. When you look at the current AI build-out, how do you think about this relative to in the late '90s with respect to the Internet build-out. And interested in your thoughts on durability, sustainability, integrity, just how you're contemplating and thinking about all these orders and the optionality going forward?

Yes. Thanks, Ben. I think this is a common question that we get, particularly since we live through it. I think there's a few differences. I think that the speed at which this transition is moving is even faster than what it was, I think, at the turn of the century and in the dot-com days. I also think that the companies that are investing in this are massive, strong balance sheet, strong cash flow, profitable companies and that's -- a lot of the spend is coming from companies that are incredibly strong who view this as is existential, right?

And so -- this is not -- it's not -- there aren't as many companies that are making bets that don't have business models. I mean there's clearly going to be winners and losers. But I think there's such a concentration of spend from highly profitable strong balance sheet, strong cash flow companies. I think that's a big difference. And I think the pace at which this is moving is meaningfully different.

I think just to be determined, sort of the impact on society and the impact on business relative to what we saw in the -- at the turn of the century, around 2000. But it is the pace is what's hugely different for me. So it's an area we're really excited about. So thanks for the question, Ben.

Thank you, Ben. I'm going to hand it over to Chuck for some closing remarks on our conference call.

Let me just start by saying how proud I am of our team. How hard they've worked to get to these results. I think the innovation that our teams are delivering is at an all-time high. The commitment and the focus on listening to our customers and delivering the technology that they need right now is fantastic.

I think the last 12 to 18 months, the real emergence of the importance of the network in this AI wave is very clear, and that's what we do best. And so driving a lot of innovation in the network, I think at a time where the network is becoming more important is huge. It's just the beginning. We have momentum with the hyperscalers. We see the growing opportunity across enterprise, sovereign and neo-cloud. We've got this multiyear, multibillion-dollar network refresh opportunity. And again, with what I think is an unmatched innovation pipeline as well as an acceleration of our global partnerships, and it really does position us for the strongest fiscal year we've ever had.

So we have a lot of confidence. We have a lot of excitement and I want to just once more thank the teams for everything they do. And then Sami, I'll turn it back over to you.