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SEC filingCisco's Q3 FY26 revenue grew 12% YoY driven by Networking, with operating margin expansion offsetting gross margin compression.
Cisco delivered strong results in the third quarter of fiscal 2026, with total revenue increasing 12% year-over-year to $15.84 billion. Product revenue was the primary growth engine, rising 17% to $12.12 billion, while services revenue declined 1% to $3.72 billion. The revenue growth was broad-based across all geographic segments and customer markets.
Gross margin declined 2.0 percentage points to 63.6%, driven by a 2.5 percentage point drop in product gross margin to 61.9%. The product margin compression was primarily attributed to negative product mix (especially higher Networking revenue) and higher memory costs, partially offset by productivity improvements and lower amortization of purchased intangible assets. Services gross margin improved slightly by 0.5 percentage points to 69.2% due to cost efficiencies.
Operating income rose 24% to $3.96 billion, and operating margin expanded 2.4 percentage points to 25.0%, benefiting from revenue growth and a 3.8 percentage point reduction in R&D, sales and marketing, and G&A expenses as a percentage of revenue. Net income increased 35% to $3.37 billion, and diluted EPS grew 37% to $0.85.
All three geographic segments contributed to revenue growth. The Americas segment, representing 60.4% of total revenue, grew 14% to $9.57 billion, led by product revenue growth of 20% driven by AI Infrastructure solutions in the Service Provider and Cloud customer market. EMEA revenue increased 9% to $4.05 billion, with product revenue up 11% across all customer markets. APJC revenue rose 9% to $2.22 billion, with product revenue up 14% and notable strength in China (+42%) and India (+22%).
From a product category perspective, Networking was the standout performer with 25% revenue growth to $8.82 billion, driven by double-digit growth in Campus Switching, Data Center Switching, Wireless, and Service Provider Routing, particularly within AI Infrastructure solutions. Security revenue was flat at $2.01 billion, as declines in prior-generation products and Splunk offerings were offset by growth in new and refreshed products. Collaboration revenue declined 1% to $1.02 billion, while Observability grew 3% to $269 million.
Management highlighted a continued positive demand environment but acknowledged ongoing challenges including memory constraints and costs, and trade policy uncertainties. The company announced a restructuring plan in the fourth quarter of fiscal 2026, expecting to recognize approximately $450 million in pre-tax charges in Q4 FY26, with total charges estimated up to $1 billion through fiscal 2027. The plan aims to reinvest cost savings into key growth opportunities including silicon, optics, security, and AI.
Inventory and purchase commitments increased significantly, with inventory up 49% and purchase commitments up 111% versus fiscal year-end, reflecting investments to secure supply for Cisco Silicon One and memory components to meet hyperscaler demand. The company expects inventory balances may increase further in future quarters. Free cash flow for the first nine months was $7.77 billion, down from $9.27 billion in the prior year period, partly due to a $2.3 billion final U.S. transition tax payment.
Cash and cash equivalents stood at $7.1B, down from $8.3B at fiscal year-end, while short-term investments (including available-for-sale debt and marketable equity) totaled $9.6B, providing combined liquidity of $16.6B. Total debt increased to $31.3B ($11.9B short-term, $19.4B long-term) from $28.1B, resulting in net debt of $14.7B. Shareholders' equity improved to $48.9B from $46.8B, driven by retained earnings growth.
Inventory purchase commitments with contract manufacturers and suppliers surged to $16.0B (April 25, 2026), more than doubling from $7.6B at July 26, 2025. The vast majority ($14.1B) is due within one year, signaling aggressive supply chain positioning. A liability of $209M was recorded for excess commitments. Other commitments include $0.6B in funding commitments for non-marketable equity securities.
Stock repurchases totaled $4.6B (63M shares) in the first nine months, with $9.6B remaining under the program. Dividends declared amounted to $4.9B ($1.24 per share), up 2.5% from the prior year. Debt activity was significant: $10.6B issued (primarily commercial paper and notes) and $7.9B repaid, resulting in net debt issuance of $2.8B (plus short-term borrowings). Capital expenditures were $1.0B, or 2.2% of total revenue.
Segment data (Note 19) shows Americas contributed $27.4B (59.5% of total revenue), EMEA $12.3B (26.6%), and APJC $6.4B (13.9%). Segment gross margins were 65.4% (Americas), 71.7% (EMEA), and 66.3% (APJC). The unallocated corporate items (share-based comp, amortization, restructuring) reduced overall gross margin by $1.2B. Revenue by product group: Networking $24.9B (+20.4% YoY), Security $6.0B (-2.2%), Collaboration $3.1B (+0.7%), Observability $0.8B (+3.0%), and Services $11.2B (-0.2%).