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SEC filingCisco's Q2 FY26 revenue grew 10% YoY to $15.35B, driven by Networking +21%, with operating margin expansion of 230 bps.
In Q2 FY26, Cisco delivered strong revenue growth of 10% YoY to $15.35B, with product revenue up 14% and services revenue declining 1%. The revenue increase was broad-based across all geographic segments, with Americas +8%, EMEA +15%, and APJC +8%. Net income rose 31% to $2.8B, and diluted EPS increased 31% to $0.80, reflecting revenue growth and operating leverage.
Gross margin declined slightly by 0.1 percentage points to 65.0%, as productivity improvements (+270 bps) and lower amortization of purchased intangible assets (+130 bps) were more than offset by negative product mix (-310 bps) and pricing (-90 bps). Product gross margin improved 0.2 percentage points due to the same factors. Operating margin expanded 230 bps to 24.6%, driven by revenue growth and lower amortization. The effective tax rate decreased to 12.9% from 15.9% in the prior year, primarily due to a larger stock-based compensation windfall benefit.
All three geographic segments showed positive momentum:
From a product category perspective, Networking revenue surged 21% to $8.294B, driven by AI Infrastructure and Campus Networking solutions. Security revenue declined 4% to $2.018B, impacted by prior-generation products and a shift from on-premise Splunk deals to cloud subscriptions. Collaboration grew 6%, and Observability was flat.
Cisco's MD&A indicates continued positive business momentum in AI Infrastructure and Campus Networking, with expectations for the shift in Splunk consumption to cloud subscriptions to persist in the second half of fiscal 2026. The company completed its restructuring plan in Q2 FY26, which will reduce ongoing charges. Management remains focused on investing in AI, security, and collaboration while managing supply chain risks related to memory costs, trade policy, and purchase commitments. The company targets returning at least 50% of free cash flow annually to shareholders via dividends and buybacks.
Operating cash flow (CFO) of $5,034 million for the first six months of fiscal 2026 was $868 million lower than the prior-year period ($5,902 million), a decline of 14.7%. Net income increased to $6,035 million from $5,139 million, but CFO lagged net income due to significant working capital outflows. Key drags included a $761 million inventory build (vs. a $441 million reduction last year), a $120 million increase in financing receivables, and a $2,503 million net income tax payment (up from $2,285 million). Deferred revenue also declined by $290 million.
Capital expenditures (capex) rose to $606 million from $427 million, representing a capex intensity of 12.0% of CFO (vs. 7.2% last year). Free cash flow (CFO minus capex) was approximately $4,428 million, down from $5,475 million in the prior period.
Capital returns to shareholders totaled $6,589 million ($3,355 million in share repurchases and $3,234 million in dividends), exceeding CFO and indicating reliance on debt issuance ($4,241 million) and short-term borrowings ($750 million) to fund returns. The company also repaid $2,992 million of debt.
Anomalies: The large income tax payment ($2,503 million) and inventory build are notable working capital uses. Investing activities included net purchases of investments ($4,228 million purchases vs. $3,748 million proceeds from sales/maturities).