Cisco (CSCO) Q1 2027 earnings review
Cisco lifts its AI sales plan, but hardware margins fall
Cisco's networking hardware boom is accelerating while its software and security businesses grow at a fraction of that pace. Total sales at the networking equipment maker jumped 24% from a year ago to $18.5 billion, driven by a 43% rise in networking gear, and flat overhead lifted profit per share much faster. Chief executive Chuck Robbins raised the full-year outlook across the board, though by our math the new plan has revenue growth slowing to 17% in the second half.
| Revenue | $18.5B +24% from a year ago |
|---|---|
| Profit per share, excluding one-offs | $1.40 +40% from a year ago |
| AI revenue outlook from cloud giants | Raised to $9B up from $7.5B target |
| Full-year revenue outlook | Raised $2.5B middle of the range: 19% growth |
⚖️ Verdict: 🟢 Bullish
The story got better because cloud AI orders are turning into revenue faster than planned, lifting this year's hyperscaler AI target from $7.5 billion to $9 billion and raising the core business outlook too. Two cautions remain: heavy shipments of cloud hardware pushed product gross margin excluding one-offs down 3.5 percentage points, and inventory climbed another 12% to $6.4 billion.
The question now is whether this hardware surge is a multi-year upgrade cycle or a burst of cloud spending inflated by price hikes. If it is a lasting cycle, second-half growth will beat the 17% implied plan; if it was pulled forward, slowing orders will leave Cisco holding custom inventory. First-quarter order numbers on the call and second-half shipments will tell.
🐂 Bull Case
Cloud Giants Drive a 43% Networking Jump
Cisco sells switches, routers and optical gear that connect data centers and corporate offices. Chief executive Chuck Robbins said, "We are in the very early stages of a multi-year networking supercycle." First-quarter results backed him up, as networking sales rose 43% from a year ago to $11.1 billion.
The networking group also raised its full-year forecast for artificial intelligence (AI) infrastructure revenue from hyperscalers — the largest cloud computing companies — to $9 billion, up from the $7.5 billion target set three months ago. That $9 billion plan is more than double the $4 billion recorded in fiscal 2026.
This matters because past orders are now turning into deliveries faster than management planned. Cisco raised its full-year total revenue outlook by $2.5 billion at the middle of the range, so the $1.5 billion AI increase accounts for most of the upgrade while Silicon One chip win details wait for the call.
What to watch: hyperscaler AI infrastructure orders for the first quarter, which management usually gives on the conference call. A reading above last year's $1.3 billion would show that cloud customers are still refilling the pipeline as shipments rise.
Flat Overhead Lifts Operating Margin to 37.8%
Finance chief Mark Patterson said, "As our business continues to scale, we are unlocking significant operating leverage which is enabling us to grow earnings much faster than revenue." Operating margin excluding one-offs reached 37.8%, up 3.4 percentage points from a year ago and 1.3 points above the top of the company's plan.
- Sales and marketing: 15.3% of revenue, down 4.0 percentage points from a year ago
- Research and development: 13.1% of revenue, down 3.0 percentage points
- General and administrative: 3.9% of revenue, down 1.1 percentage points
- Operating expenses excluding one-offs: $5.1 billion, up 2% against 24% revenue growth
Keeping overhead nearly unchanged allowed the hardware maker to overcome a 2.5-point drop in gross margin and still grow profit per share excluding one-offs by 40%. When a few cloud buyers place multibillion-dollar orders, Cisco does not need to hire more salespeople to close them.
What to watch: operating margin excluding one-offs in the second quarter, planned at 36% to 37%. Holding above 36.5% would show that overhead restraint still outweighs hardware cost pressure.
Core Business Raised Above Long-Term Target
Beyond cloud AI gear, Cisco relies on corporate and government buyers refreshing office switches and Wi-Fi networks, including early pipeline drivers like its Mythos software. In the first quarter, the US group reported "double-digit growth across all geographies and customer markets", with sales up 28% in the Americas, 18% in Europe, Middle East and Africa (EMEA), and 21% in Asia-Pacific, Japan and China (APJC).
By our math, subtracting the $9 billion AI target from the new full-year revenue plan leaves $65.8 billion to $66.8 billion for the rest of the business. That points to 11.8% growth at the middle of the range, up from the 10.1% implied three months ago, because corporate demand is running at roughly double Cisco's old 4% to 6% pace.
What to watch: product order growth excluding hyperscalers on the conference call. A rate near last quarter's 25% would confirm that corporate buyers are ordering more equipment beyond the ~4 to 5 percentage points of price increases.
🐻 Bear Case
Hardware Mix Cuts Product Gross Margin Again
Selling more AI switches and optical transceivers to cloud giants comes with a trade-off on profitability per box. Total gross margin excluding one-offs fell 2.5 percentage points from a year ago to 65.6%, as the cost of making products and delivering services rose 1.8 percentage points of revenue on a reported basis.
The pressure sat entirely in hardware. Product gross margin excluding one-offs dropped 3.5 percentage points from a year ago to 63.7%, its steepest decline of the past five quarters, while services gross margin rose 2.2 points to 72.9%. Cloud buyers command lower prices on high-volume systems, and memory component costs remain high.
This matters because hardware mix is shifting toward these lower-margin systems as AI shipments double. For the second quarter, management plans a gross margin excluding one-offs of 65% to 66%, down from 67.5% a year ago, so the margin drag will persist.
What to watch: product gross margin excluding one-offs in the second quarter. A drop below 63% would show that cloud hardware shipments and memory costs are eroding profitability faster than price increases on corporate gear can offset.
Inventory Climbs Another 12% on Custom Gear
To meet cloud orders, Cisco has been stockpiling components and finished gear on its balance sheet. In the first quarter, inventories rose another 12% from three months ago to $6.38 billion, which is up 88% from $3.40 billion a year earlier and absorbed $686 million of operating cash.
At the end of last year, the networking vendor also carried $17.2 billion of purchase commitments with suppliers, much of it for custom parts built for a handful of cloud buyers whose cancellation windows are shorter than component lead times. Because inventory is still rising faster than sales, Cisco holds more exposure if a cloud customer delays a data center build.
What to watch: inventory purchase commitments in the first-quarter 10-Q filing. An increase above $17.2 billion would mean Cisco is locking in even more supplier obligations at the peak of the cycle.
Security and Recurring Contracts Lag the Boom
Cisco highlighted "double-digit growth across all geographies and customer markets", and wants security and software subscriptions to make its business less cyclical. Yet three of its five product and service lines missed that mark: Security grew 7% to $2.12 billion, Collaboration rose 8%, Observability edged up 2%, and Services grew 1%.
Remaining performance obligations (RPO) — the total value of contracted software and services not yet delivered — rose 8% from a year ago to $46.2 billion, and shrank by $565 million from last quarter by our math. That cuts against the broad growth claim because the boom is almost entirely hardware, while Security remains below its old 15% to 17% target despite buying WideField Security.
What to watch: annualized recurring revenue (ARR), the yearly value of subscription contracts, on the call. Growth stuck near last quarter's 3% would confirm that software subscriptions are not participating in the hardware boom.
Risks this quarter didn't answer
Four standing concerns depend on order, pricing and supply-chain figures that live in the conference call or the 10-Q filing rather than the earnings release.
- Hyperscaler AI order concentration and lumpiness: the release gave the $9 billion revenue target, but not first-quarter AI orders; the conference call remarks will show whether bookings matched last quarter's $4.0 billion.
- Order pull-ahead ahead of price increases: product order growth excluding cloud giants was not in the release; the call will show if orders held near 25%.
- Price contribution to revenue growth: management previously planned 4 to 5 percentage points of price benefit for fiscal 2027; the call will clarify how much of the 24% growth was volume.
- Supplier purchase commitments and tariffs: off-balance-sheet commitments ($17.2 billion last quarter) and any tariff cost updates await the 10-Q filing.
💲 Other KPIs
Free cash flow — operating cash flow minus property and equipment purchases — rose 33.4% from a year ago by our math, reversing a 16% drop in the same quarter last year. Operating cash flow climbed 35.6% to $4.36 billion despite the $686 million inventory build, while capital spending rose to $502 million, or 2.7% of revenue.
Diluted shares fell 0.4% from a year ago, down 15 million shares. The networking company spent $2.0 billion to buy back 18 million shares at an average price of $112.38, up from $68.28 a year ago when the same $2.0 billion retired 29 million shares. Alongside $1.65 billion in dividends, capital returns consumed 95% of free cash flow.
Deferred revenue — cash customers have paid for software and services not yet delivered — rose 7.5% from a year ago and 0.9% from last quarter. Deferred services revenue grew 9.0% to $16.05 billion and deferred product revenue rose 5.7% to $14.01 billion, trailing the 32% jump in shipped product revenue.
🔮 Guidance
Raised. The middle of the range moved up $2.5 billion to $75.3 billion, or 18.9% growth for the year. By our math, after Q1 actuals and the Q2 outlook, the plan leaves 16.9% growth for the second half against tougher prior-year comparisons of 12% and 18%. Last year Cisco raised its annual outlook three times and beat the final range.
Raised. The company lifted its full-year target for cloud AI revenue by $1.5 billion, to more than double last year's $4.0 billion total. It is the second straight $1.5 billion raise after management moved the target from at least $6.0 billion in Q3 to $7.5 billion in Q4.
Raised. Management lifted the middle of the range by $0.42 to $5.50, pointing to 27.0% growth for the year. By our math, that leaves 20.6% growth for the second half, down from 40.0% in Q1 and 29.8% planned for Q2 as prior-year comparisons stiffen.
Raised. The middle of the range rose $0.38 to $4.41, or 32.4% growth from last year's $3.33, even with the full-year tax rate assumption moving up from 14.5% to 16.0%. By our math, the plan leaves 20.3% growth in the second half and includes $0.11 per share of restructuring charges.
New. The plan calls for 17.9% growth from a year ago at the middle of the range, slowing from 24.4% in Q1 and dipping 2.3% from Q1 levels. Cisco has beaten the top of its quarterly revenue range in seven of the last eight quarters, by an average of 2.2% against the middle of the range over the last four.
New. The range is identical to Q1's outlook and puts the middle at 65.5%, alongside a reported gross margin plan of 63% to 64%. That stays flat with Q1's 65.6% result and down 2.0 percentage points from 67.5% in Q2 last year as hardware mix continues to weigh.
New. The middle of the range sits at 36.5%, with reported operating margin planned at 27% to 28% after 1.5 points of restructuring charges. That is up 1.9 percentage points from 34.6% a year ago, though down 1.3 points from Q1's 37.8% record.
New. At the middle of the range, profit per share excluding one-offs grows 29.8% from last year's $1.04, while reported profit per share of $1.07 to $1.09 grows 35.0% from $0.80. The company has beaten the top of its quarterly profit per share range for five straight quarters.
❓ Key Questions
What were Q1 hyperscaler AI orders and non-hyperscaler order growth?
The press release raised the FY27 AI revenue target to $9 billion, but omitted quarterly order growth and AI bookings. Because RPO only tracks software and services, investors need the call's order numbers to see if hardware demand is still growing at 35%.
Did supplier purchase commitments rise alongside the $6.4B inventory balance?
On-balance-sheet inventory rose another $690 million in Q1 to $6.38 billion. Last quarter's filing showed $17.2 billion in off-balance-sheet purchase commitments, mostly non-cancelable for custom cloud parts; we need the Q1 commitment figure and cancellation terms.
How much of Q1's 32% product growth came from price?
Management previously said price increases added about 5 percentage points to Q4 revenue and would add 4 to 5 points in FY27. Knowing the unit volume growth in Q1 will show how much of the campus refresh is physical equipment upgrades.
Why is Security still growing 7% after the WideField acquisition?
Security revenue grew 7% in Q1, slowing from 14% in Q4 and remaining below management's old 15% to 17% target even as Cisco closed the WideField Security deal. Management has not said when the Splunk cloud transition drag will end.