CISCO SYSTEMS, INC. (CSCO)·Q2 2025 Earnings Summary

Executive Summary

• Cisco delivered Q2 FY25 revenue of $14.0B, up 9% y/y and modestly above Q1 ($14.0B vs $13.8B), with non-GAAP EPS of $0.94; both finished above the high end of guidance as product orders accelerated 29% y/y and AI infrastructure orders topped $350M in the quarter ($700M 1H, on track for >$1B FY25) .
• Mix and Splunk helped margins: non-GAAP gross margin rose 200 bps y/y to 68.7% and non-GAAP operating margin reached 34.7%; Networking fell 3% y/y, but Security (+117% y/y, largely Splunk) and Observability (+47% y/y) were strong .
• Guidance raised: FY25 revenue to $56.0–$56.5B and non-GAAP EPS to $3.68–$3.74; Q3 revenue guided to $13.9–$14.1B and non-GAAP EPS to $0.90–$0.92. Management embedded proposed China/Mexico/Canada tariff costs in Q3 gross margin (67–68%) and reiterated mitigation plans .
• Capital returns: quarterly dividend raised to $0.41 and buyback authorization increased by $15B (≈$17B remaining), potential stock catalysts alongside accelerating AI orders, raised FY25 outlook, and improving regional trends (Americas +9%, EMEA +11%, APJC +8%) .

What Went Well and What Went Wrong

• What Went Well

  • Orders momentum and AI traction: “New product orders grew 29%, up 11% organically… AI infrastructure orders… surpassed $350 million… on track to exceed $1 billion of AI infrastructure orders in fiscal year ’25” .
  • Margin execution and Splunk accretion: non-GAAP GM 68.7% (+200 bps y/y) and OM 34.7%; “Splunk… was accretive to Q2 non-GAAP EPS, earlier than we had planned” .
  • Recurring metrics: ARR $30.1B (+22% y/y); subscription revenue $7.9B (56% of total); software revenue $5.5B (+33% y/y) .

• What Went Wrong

  • Organic growth still mixed: Ex-Splunk, total revenue declined 1% y/y; Networking revenue down 3% y/y despite strengthening orders, reflecting prior-year backlog dynamics and server declines .
  • GAAP earnings declined: GAAP EPS fell 6% y/y to $0.61 amid higher opex and amortization/transaction costs; GAAP net income down 8% y/y .
  • Q3 margin step-down: Q3 non-GAAP GM guided to 67–68% vs 68.7% in Q2 due to embedded tariff cost assumptions; management flagged a “fluid” environment, though mitigation levers are ready .

Financial Results

Segment revenue and mix

Key performance indicators

Guidance Changes

Note: Q3 gross margin guidance includes proposed tariffs on Mexico, Canada, and China .

Earnings Call Themes & Trends

Management Commentary

• “New product orders grew 29%, up 11% organically… AI infrastructure orders with webscalers in Q2 surpassed $350 million… on track to exceed $1 billion… in fiscal year ’25” – Chuck Robbins, CEO .
• “Q2 was another quarter of solid execution… Splunk… was accretive to Q2 non-GAAP EPS, earlier than we had planned” – Scott Herren, CFO .
• “In our guidance, we have accounted for the added cost driven by the increased tariffs… we’re prepared to take actions to mitigate the impact” – Scott Herren .
• “Lead times are not extending… demand we’re seeing today is not a function of extended lead times” – Scott Herren .
• “We booked major [Hypershield] platform deals with 2 Fortune 100 enterprise customers… and unveiled AI Defense” – Chuck Robbins .

Q&A Highlights

• Tariffs and margins: Q3 GM guide (67–68%) includes proposed tariff costs (China +10%, Mexico/Canada +25%); Cisco plans supply-chain mitigation; no evidence of demand pull-ahead .
• Webscale demand: “If you can build more, we will buy more”; some 2025 unit targets increased by 50%; AI orders expected to convert to revenue ramp in 2H FY25 .
• Enterprise AI adoption: Early days; infrastructure to support inference (AI PODs, Hyperfabric, AI Defense, DPU Smart Switch) expected to drive future adoption .
• Splunk trajectory: Apparent y/y math noise due to calendar alignment; Splunk growing double digits and ahead on profitability .
• Co-packaged optics/consumption model: Cisco will “meet customers where they are,” offering systems, optics, optical systems, or silicon as needed .
• Lead times: Normalization affirmed; no extension or backlog-driven demand .

Estimates Context

• S&P Global (Capital IQ) consensus EPS and revenue estimates could not be retrieved due to API rate limits at query time. As a result, vs-consensus comparisons are unavailable in this recap. We note actual Q2 results were above the high end of Cisco’s own guidance and FY25 guidance was raised, suggesting likely positive estimate revisions ahead .

Key Takeaways for Investors

• Orders momentum is real and increasingly AI-driven: accelerating product orders (+29% y/y) and >$350M AI infra orders in Q2 (>$1B FY25 target) should underpin 2H revenue inflection and multi-year positioning in webscale and enterprise AI .
• Mix tailwinds and Splunk synergy support margins: non-GAAP GM 68.7% (+200 bps y/y) and earlier-than-planned Splunk accretion offset pressure in Networking revenue; ex-Splunk growth remains a watch item .
• Guidance reset higher despite tariff headwinds: FY25 revenue/EPS raised; Q3 GM includes tariff assumptions, with mitigation levers prepared—suggesting prudent de-risking of the outlook .
• Regional recovery broadening: all geographies grew in Q2 (Americas +9%, EMEA +11%, APJC +8%), a favorable signal after declines in prior quarters .
• Product innovation cycle is a differentiator: AI Defense, Hypershield momentum, Smart Switch with embedded DPUs, and 51.2T Silicon One timing enhance Cisco’s enterprise AI/inference and security narratives .
• Capital returns enhanced: dividend raised to $0.41 and buyback authorization increased by $15B (~$17B remaining), providing support while growth re-accelerates .
• Near-term trading lens: Focus on AI order-to-revenue conversion in 2H, Networking trajectory (servers vs. switching), tariff mitigation progress, and Splunk-driven software/ARR expansion as drivers of estimate and multiple revisions .

Non-GAAP adjustments note: Key bridges include share-based comp, amortization of acquisition-related intangibles, acquisition/divestiture costs, and tax effects; Q2 non-GAAP EPS of $0.94 vs GAAP $0.61 reflects these adjustments .