Q2 2025 Summary
Published Feb 18, 2025, 11:05 PM UTC- Strong demand across geographies and segments, with double-digit demand for campus switching, enterprise routing, and wireless, as well as the fourth consecutive quarter of double-digit demand growth in the Nexus data center switching portfolio. Additionally, in the webscale segment, 3 of the 6 major webscale customers grew over 100% year-over-year, and 2 of the 6 grew over 50%, indicating robust performance.
- Cisco is well-positioned to benefit from increasing investments in AI infrastructure by enterprises and telcos. Customers are beginning to spend on AI-driven infrastructure, and Cisco offers products like AI PODs, Hyperfabric, AI Defense, Hypershield, and a new DPU switch to support AI applications. They believe that as enterprises leverage their proprietary data for AI, the opportunity is an order of magnitude higher than what's been seen in training to date.
- The integration of Splunk is performing well, with double-digit growth and profitability ahead of expectations. Security products are gaining traction, with over 1,000 customers deploying Cisco Secure Access and XDR, each supporting over 1 million enterprise users. Hypershield has secured wins with 2 Fortune 100 enterprise customers, and AI Defense has significant interest, with about 20 customers entering proofs of concept.
- Expected decline in gross margins due to built-in costs of proposed tariffs, including additional tariffs on imports from China, Mexico, and Canada, with no mitigation assumed, which could pressure profitability.
- Potential deceleration in enterprise orders (excluding Splunk), with sequential growth slowing compared to prior quarters, raising concerns about underlying demand in the enterprise segment.
- Increased competition from white-box ODMs in large networking projects, potentially posing a risk to Cisco's market share in core networking segments.
| Metric | YoY Change | Reason |
|---|---|---|
Total Revenue | +9.4% (from $12,791M to $13,991M) | Revenue growth was driven by strong underlying product and services performance, building on last period’s improvements as easing supply chain constraints and increased product deliveries bolstered the quarter’s figures. |
Security Revenue | +116% (from $973M to $2,111M) | The dramatic increase is largely due to the integration of Splunk’s contribution and the accelerated adoption of new security offerings, which contrasts sharply with the much lower baseline of the previous period. |
Observability Revenue | +47% (from $188M to $277M) | Robust innovation and enhanced network assurance offerings drove the significant rise, building on the previous launcher’s success and expanding customer adoption. |
Services Revenue | +5.5% (from $3,559M to $3,757M) | Steady organic growth in advisory, support, and maintenance services underpinned this modest increase, continuing the trend from the prior period with incremental contributions across geographies. |
Americas Revenue | +9.1% (from $7,510M to $8,202M) | Improved product deliveries and robust demand in key markets, particularly benefiting from easing supply challenges, contributed to the growth, building on the prior period’s performance despite some headwinds in specific segments. |
EMEA Revenue | +10.7% (from $3,484M to $3,855M) | Growth in the EMEA segment reflects resilient performance across various markets, offsetting previous contractions in certain countries, and indicates a more balanced revenue mix compared to the lower figures in the prior period. |
APJC Revenue | +7.7% (from $1,798M to $1,934M) | Moderate gains in APJC are driven by a slight recovery in product revenue partially offset by stronger services performance, maintaining steady momentum compared to last period’s figures. |
Operating Income | Nearly flat ($3,113M vs. $3,096M) | Despite the revenue uptick, increased integration and restructuring expenses (including costs tied to the Splunk acquisition) negated operating margin improvements, leaving operating income largely unchanged relative to the previous period. |
Net Income | -7.8% (from $2,634M to $2,428M) | The decline in net income stems from higher operating expenses and additional restructuring and amortization costs, which overwhelmed the positive revenue drivers that had boosted the previous period’s figures. |
Basic EPS | -6% (from $0.65 to $0.61) | Reflecting the dip in net income and increased expense burdens, the Basic EPS declined as the impact of higher acquisition-related costs and restructuring expenses weighed on profitability relative to the previous period. |
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Revenue | Q3 2025 | $13.75 billion to $13.95 billion | $13.9 billion to $14.1 billion | raised |
Non-GAAP Gross Margin | Q3 2025 | 68% to 69% | 67% to 68% | lowered |
Non-GAAP Operating Margin | Q3 2025 | 33.5% to 34.5% | 33% to 34% | lowered |
Non-GAAP EPS | Q3 2025 | $0.89 to $0.91 | $0.90 to $0.92 | raised |
Revenue | FY 2025 | $55.3 billion to $56.3 billion | $56 billion to $56.5 billion | raised |
Non-GAAP EPS | FY 2025 | $3.60 to $3.66 | $3.68 to $3.74 | raised |
Non-GAAP Effective Tax Rate | FY 2025 | approximately 19% | approximately 19% | no change |
| Metric | Period | Guidance | Actual | Performance |
|---|---|---|---|---|
Revenue | Q2 2025 | $13.75B to $13.95B | $13.991B | Beat |
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AI Orders and Revenue Timing
Q: Are the $700 million AI orders mainly switching and optical? When will revenue be recognized?
A: The $700 million in AI orders this year comprise a combination of systems, silicon, optics, and optical systems, with about half in silicon and systems. Revenue from these AI orders is expected to begin ramping in the second half of the fiscal year, consistent with earlier expectations. -
Splunk Performance and Integration
Q: Was Splunk down 11% year-over-year? How is the integration progressing?
A: Splunk is still growing double digits, right in line with expectations and even modestly ahead on the top line. The apparent decline is due to a timing issue; Splunk's Q4 results, which are seasonally strong, were not fully captured in Cisco's Q2 results due to calendar alignment and will flow into Q3. Integration is ongoing, with over 1,000 customers deploying combined products like Cisco Secure Access and XDR, each supporting over 1 million enterprise users. -
Gross Margin Guidance and Tariff Impact
Q: What informs the gross margin guidance step-down? How will tariffs impact demand?
A: The gross margin guidance of 67% to 68% for Q3 reflects the built-in cost of proposed tariffs, including an additional 10% in China and 25% on Canada and Mexico. The supply chain team has mitigated tariff impacts by about 80% from initial levels. There is no evidence of customers pulling demand ahead, and lead times are not extending; the tariff environment remains fluid. -
Enterprise Investing in AI
Q: How meaningful is enterprise investment in AI for Cisco's business today?
A: Enterprises are in the early stages of AI adoption, figuring out use cases. Spending on AI-driven infrastructure is beginning, supported by Cisco's offerings like AI PODs, Hyperfabric, AI Defense, and Hypershield. As enterprises leverage proprietary data for training and inference, the opportunity is expected to be an order of magnitude higher than current training activities. -
Telco Demand and AI Readiness
Q: How is Cisco's telco segment performing, and how are telcos embracing AI?
A: The telco segment had a good quarter, continuing from Q1, with telcos building out networks in anticipation of increased demand driven by AI. European operators are preparing to deliver AI-as-a-Service and planning AI edge applications, indicating they are preparing for the increased network load. -
New Switch with AMD DPU
Q: Can you discuss the new 9300 Nexus switch with AMD DPU and its impact?
A: The new 9300 Nexus switch, featuring an AMD DPU, is a breakthrough product that integrates security directly into the network at line speed. It allows running network and security services on DPUs at ASIC speeds, eliminating the need for central processing. The first use case is Hypershield, already winning in two Fortune 100 enterprises, providing security inspection to protect data center zones from east-west threats. -
Competition and Alternative Technologies
Q: How is Cisco responding to competitive threats from white-box ODMs and new technologies like DeepSeek?
A: Cisco recognizes the emergence of alternative technologies and competitors but believes its success in the webscale space positions it well to capitalize on new opportunities. While technologies like DeepSeek may facilitate faster AI advancement, Cisco is confident in its offerings like AI Defense and continues to focus on innovation and customer value. -
Co-packaged Optics Strategy
Q: How is Cisco approaching the technology of co-packaged optics?
A: Cisco continues to evolve its offerings to meet market needs, providing systems with integrated optics, stand-alone optics, optical systems, or silicon. Regardless of how the market evolves, Cisco aims to meet customers where they are and offer products in the way they prefer to procure them. -
Lead Times and Order Patterns
Q: Are lead times extending due to increased demand or new product introductions?
A: Lead times are not extending; the current demand is due to normalization of ordering patterns rather than lead time pressures. There hasn't been any lead time pressure, and the demand is not a function of extended lead times seen a couple of years ago. -
Campus Portfolio Strength
Q: How is strength broadening out to the campus portfolio?
A: Cisco has seen double-digit demand for campus switching, similar growth in enterprise routing, good demand for wireless, and the fourth consecutive quarter of double-digit demand growth in the Nexus data center switching portfolio. Demand has been strong across geographies and product segments. -
Enterprise AI Adoption and Data Center Constraints
Q: What are enterprises doing with AI clusters, and are data center constraints like power a bottleneck?
A: Enterprises are building clusters for training their own models or using external GPU providers, focusing on infrastructure to support inferencing. Ethernet under GPUs hasn't been a major opportunity yet. With the NVIDIA partnership and solutions like Hyperfabric and AI PODs, Cisco expects increased integration. There hasn't been significant concern over data center power constraints in the enterprise space. -
51.2T Silicon and Wi-Fi 7 Upgrades
Q: How does the 51.2T silicon relate to AI wins, and what about Wi-Fi 7 upgrades?
A: The 51.2T silicon, used in the Nexus portfolio and based on Silicon One, contributes to data center speeds and capacities, supporting AI workloads. Cisco continues to develop multiple silicon architectures for different use cases. On Wi-Fi 7, customers are getting ready to begin deploying, with a full transition expected over the next 2 to 3 quarters in both traditional on-premises and cloud-managed access points. -
Federal Government Exposure
Q: What is Cisco's exposure to potential U.S. federal government layoffs?
A: U.S. federal business represents less than 10% of Cisco's total business, with 75% of it coming from the Department of Defense. Most activity affecting the federal government is on the civilian side, so the impact is limited. Cisco is not modeling any materially higher or lower performance in federal for Q3 and Q4 compared to last quarter.