Cisco's Gross Margin Narrows Quarter Over Quarter: Is Sustaining Growth Becoming More Challenging?

Cisco Systems Gross Margin Trends and Outlook

Over the past four quarters, Cisco Systems has seen its gross margin decrease each period. In the second quarter of fiscal 2026, the company reported a non-GAAP gross margin of 67.5%, down from 68.1% in the previous quarter, 68.4% in the fourth quarter of fiscal 2025, and 68.6% in the third quarter of fiscal 2025.

Compared to the same period last year, the gross margin for the fiscal second quarter dropped by 120 basis points. The non-GAAP product gross margin fell to 66.4%, a decline of 130 basis points, mainly due to less favorable product mix and increased memory expenses, though productivity gains helped offset some of the impact. The non-GAAP services gross margin also slipped to 70.9%, representing a 70 basis point decrease year over year.

Looking ahead, Cisco anticipates its gross margin for the third quarter of fiscal 2026 to range between 65.5% and 66.5%, which would be a sequential decline of 150 basis points. This forecast reflects continued pressure from elevated memory costs and a less advantageous mix of AI-related revenue. However, Cisco expects that improved pricing strategies and tighter cost controls will help support margins in the near future.

For the third quarter of fiscal 2026, Cisco projects total revenue between $15.4 billion and $15.6 billion, a non-GAAP operating margin of 33.5% to 34.5%, and non-GAAP earnings per share between $1.02 and $1.04. For the full fiscal year 2026, the company expects revenue between $61.2 billion and $61.7 billion, with non-GAAP earnings per share in the range of $4.13 to $4.17. Cisco also anticipates AI-related orders exceeding $5 billion and plans to recognize over $3 billion in AI infrastructure revenue from hyperscale customers during the year.

Competitive Landscape: Cisco Faces Strong Rivals

Cisco is contending with intense competition from companies such as Fortinet and Okta.

• Fortinet is experiencing rapid growth in its AI-driven security operations segment. The company holds a dominant position in the firewall market with over 50% share and boasts a portfolio of 1,400 global patents, including 500 related to AI. These strengths are expected to continue fueling its growth and supporting its gross margin. Fortinet projects its non-GAAP gross margin for the first quarter of 2026 to be between 80% and 81%, up from 79.6% in the fourth quarter of 2025.
• Okta is benefiting from robust demand for its latest offerings, such as Identity Governance, Privileged Access, Device Access, Fine Grained Authorization, Identity Security Posture Management, and Identity Threat Protection powered by Okta AI. The company forecasts fiscal 2027 revenue between $3.17 billion and $3.19 billion, representing a 9% increase year over year.

Cisco Stock Performance, Valuation, and Analyst Estimates

So far this year, Cisco shares have gained 2.2%, outperforming the broader Computer and Technology sector, which has declined by 6% over the same period.

CSCO Stock’s Price Performance

Image Source: Zacks Investment Research

Currently, Cisco’s stock trades at a premium, with a trailing 12-month price-to-book ratio of 6.45, compared to the Computer Networking industry average of 6.19. The company has received a Value Score of F from Zacks.

CSCO Stock Valuation

Image Source: Zacks Investment Research

The consensus estimate from Zacks for Cisco’s third-quarter fiscal 2026 earnings stands at $1.03 per share, unchanged over the last month. This figure suggests a 7.3% increase compared to the same quarter last year.

Cisco Systems: Price and Analyst Consensus

At present, Cisco holds a Zacks Rank #2 (Buy).

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