Detailed Narrative
AI infrastructure orders inflect, driven by Silicon One and Acacia optics
Hyperscaler AI infrastructure orders reached $1.9B in Q3 versus $600M a year prior, bringing YTD to $5.3B — already above the prior $5B full-year expectation. Management raised the FY26 hyperscaler AI order outlook to ~$9B (4.5x FY25) and expects ~$4B of AI infrastructure revenue recognized in FY26. Roughly half of the AI orders were systems (Silicon One) and half optics, with the Acacia business booking over $1B in Q3. Management stressed the business is nonlinear, with Q3 at $1.9B (below Q2) and Q4 expected to accelerate to roughly $3.7B implied.
Design wins expand into scale-across with Silicon One P200
Cisco secured 5 new hyperscaler design wins in Q3 — 2 for optics (each a different hyperscaler) and 3 for systems, including its first two Silicon One P200 wins for scale-across use cases and a G200 win for scale-out. A third hyperscaler P200 scale-across win landed in the first weeks of Q4. There is no scale-across revenue in the numbers yet; early orders are expected in Q4 with scale ramp in FY27. Management framed proprietary silicon as the decisive differentiator for hyperscaler relevance and for supply-chain control.
Broad-based enterprise and campus demand beyond AI
Ex-hyperscaler product orders grew 19% YoY. Enterprise orders were up 18%, public sector up 27% (double digits across all geographies), and telco up 9%. Networking orders grew >50% overall — the seventh consecutive quarter of double-digit growth — with triple-digit SP routing/compute growth and double-digit gains in data center switching, campus switching, wireless, enterprise routing and industrial IoT. Enterprise data center switching orders rose >40%, with Nexus AI-tagged switch orders up ~50% sequentially. Campus set record orders up >25% and wireless set records up >40%, with WiFi 7 reaching half of the wireless mix.
Security transition and the Splunk cloud shift
Core security (ex-Splunk) posted double-digit order growth across new and refreshed products, with strong double-digit firewall order growth; over 1,000 new customers bought new products (Secure Access, XDR, Hypershield, AI Defense) in Q3, bringing net-new customers to ~5,000 since launch. Prior-generation declines still offset growth but by less than in H1. Splunk continued shifting from on-premise to cloud subscriptions (another 2-3 points of mix shift in Q3), a near-term revenue drag. Management expects organic security to exit FY26 approaching double-digit revenue growth.
Gross margin pressure, pricing and supply-chain response
Non-GAAP gross margin fell 260 bps to 66% (product margin -330 bps to 64.3%) on unfavorable mix and higher memory costs, partly offset by productivity. Management believes margins have stabilized (Q4 guide midpoint 66%). Levers include 20+ memory-utilization programs (e.g. new wireless products needing 50% less memory), DDR4-to-DDR5 conversions, tighter price-quote terms (notice cut from 30 to 15 days), and price increases contributing ~4-5 points of the ex-webscale order acceleration. Inventory and advance purchase commitments rose $6.7B (+48%) in 90 days and $11.6B YoY as Cisco leaned on financial strength to secure supply; silicon is secured through calendar 2026.
Capital returns, cash flow and restructuring
Cisco returned $2.9B to shareholders in Q3 ($1.7B dividend, $1.3B buyback), over $9B YTD, with $9.6B remaining on the repurchase authorization. Operating cash flow was $3.8B, down 7% on investments to meet AI demand, and cash/investments ended at $16.6B. Non-GAAP operating margin was 34.2% with OpEx down to 31.9% of revenue from 34.1% a year ago. A restructuring plan announced today will incur up to $1B in pretax charges ($450M in Q4 FY26) to reallocate resources toward silicon, optics, security and AI — described as realignment from strength, not cost savings.
AI-native innovation across security, internal tooling and quantum
Cisco expanded its Secure AI Factory with NVIDIA, introduced DefenseClaw (open source agent guardrails), Zero Trust Access for AI agents, and open-sourced the Foundry Security Spec. It is a founding member of Project Glasswing, is in private testing of Anthropic's Claude Mythos preview model for cyber defense, and is part of OpenAI's Trusted Access for Cyber program. Internally, its Circuit AI assistant reached near-universal employee adoption with over 8M quarterly interactions, and Codex (as an OpenAI design partner) was rolled out to the entire product organization. Cisco also unveiled a working prototype of a Universal Quantum Switch and its Cisco IQ delivery engine reached GA with 250+ customers onboarded.