Cisco's gross margin shrank. Why raise the profit target?
Revenue is growing much faster than running costs, helping Cisco lift earnings expectations despite a thinner gross margin.
Cisco is raising its annual earnings target even though less of each sales dollar is left after the cost of its products and services. The explanation lies in what happens to the money after that first layer of costs.
Sales rose 24% in its fiscal first quarter, while adjusted spending on research, sales and administration rose only about 2%. Spreading those running costs across a much larger business helped Cisco set a record adjusted operating margin.
Two margins moved in opposite directions
Cisco sells networking equipment, security products and software used by businesses and large cloud operators. Its adjusted gross margin, the share of sales left after product and service costs, fell to 65.6% from 68.1% a year earlier.
Operating margin also deducts the costs of running the business. Research by Ticker Byline shows that adjusted operating expenses consumed 27.8% of sales, down from 33.7%. That 5.9-percentage-point reduction more than offset the 2.5-point fall in gross margin.
| Metric | October 25, 2025 | October 24, 2026 |
|---|---|---|
| Revenue | $14.88bn | $18.52bn |
| Adjusted gross margin | 68.1% | 65.6% |
| Adjusted operating expenses | $5.02bn | $5.14bn |
| Adjusted operating margin | 34.4% | 37.8% |
The improvement also appears under U.S. accounting rules. GAAP operating profit rose to $5.60 billion from $3.36 billion, and net income rose to $4.55 billion from $2.86 billion. The stronger result is therefore visible beyond the adjusted figures.
The lower gross margin was already in the plan
August's forecast allowed for an adjusted gross margin of 65%–66%. The actual 65.6% fits that range. Revenue, however, came in $317 million above the top of Cisco's $18.0 billion–$18.2 billion target. Adjusted earnings of $1.40 a share also exceeded the $1.34 ceiling.
Networking revenue rose 43% to $11.13 billion. Cisco now expects $9 billion of annual AI infrastructure revenue from hyperscalers, the large cloud-computing operators, up from $7.5 billion previously. That is a revenue target, separate from customer orders.
A larger annual target, with a margin test still ahead
The fiscal 2027 revenue forecast rises to $74.8 billion–$75.8 billion from $72.2 billion–$73.4 billion. The adjusted earnings target moves to $5.47–$5.53 a share from $5.05–$5.11.
For the next quarter, Cisco expects adjusted gross margin of 65%–66% and operating margin of 36%–37%, below the first quarter's 37.8%. The next results will test whether fast sales growth and restrained running costs keep offsetting the thinner gross margin. Our Cisco company profile records those targets alongside cash flow, debt and acquisitions.