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Cisco Systems (CSCO -11%) is trading sharply lower despite reporting modest EPS upside for Q2 (Jan). Revenue grew 9.7% yr/yr to $15.35 bln, which was above analyst expectations. Q3 (Apr) guidance was solid with in-line EPS and upside revenue. Cisco also raised its FY26 outlook and announced a small dividend increase, but rising memory prices are pressuring gross margins.

• Total product revenue was $11.6 bln, up 14% yr/yr, while services revenue was $3.7 bln, down 1% yr/yr.
• Networking revenue grew 21%, driven by AI infrastructure and campus refresh activity, with double-digit growth in campus switching, data center switching, wireless, service provider routing, enterprise routing, and compute. Security revenue declined 4%, reflecting weakness in prior generation products and the ongoing transition of Splunk from on-premises to cloud subscriptions.
• AI infrastructure orders from hyperscalers totaled $2.1 bln in Q2, up from $1.3 bln in Q1 and equal to the total for all of FY25.
• Cisco now expects to take over $5 bln in AI orders and recognize more than $3 bln in AI infrastructure revenue from hyperscalers in FY26.
• Q2 non-GAAP gross margin declined to 67.5% from 68.7% a year ago, and Cisco guided to 65.5-66.5% for Q3 due to higher memory costs.

Briefing.com Analyst Insight:

Cisco continues to execute well operationally, particularly in networking where AI infrastructure and next-generation campus products are driving meaningful acceleration in orders. The surge in AI-related demand, especially for Silicon One systems and optics, positions Cisco as a key beneficiary of hyperscaler spending in FY26. However, margin compression tied to rising memory prices is overshadowing the otherwise solid quarter. While management is taking pricing actions and adjusting contract terms to offset component inflation, investors appear concerned about the near-term gross margin trajectory. Even so, Cisco's scale, diversified portfolio, and strong AI order momentum makes the company confident it is better positioned than many peers to navigate this industry-wide cost pressure. On a final note, Broadcom (AVGO -1%) is a key supplier to Cisco. It is trading lower in sympathy.