Cisco Systems (CSCO)

Business Overview

Cisco Systems is networking equipment with a large recurring mix and material stock pay. FY2026 (year to 25 July 2026) revenue was $63.3B. Gross margin was 64.5% and operating margin 24.3%. R&D was 15.1% of revenue. Stock-based compensation was 6.0%, the highest stock-pay share in the hardware set. Free cash flow was $12.8B.

Subscription revenue was $32.0B, or 50.5% of total (product subscriptions $18.3B plus services subscriptions $13.7B). Product gross margin was 63.2%. Remaining performance obligations were $46.7B, up from $43.5B. Purchase commitments were $17.2B, up from $7.6B (filed: up 126%). Cash conversion cycle was 81 days (DIO 93, DSO 43, DPO 55). Gross margin has stayed in a 62.0% to 64.9% band from FY2016 through FY2026.

How the Numbers Read

Half the revenue is already subscription, so the margin structure looks more like software-plus-hardware than a pure box business. Product gross margin at 63.2% is close to the company 64.5% blend. Stock pay at 6.0% of revenue is the hardware set's high; free cash flow after stock pay is thinner than the $12.8B headline by that share of revenue.

Unlike Apple or Dell, Cisco runs a positive cash conversion cycle (81 days), with inventory at 93 days of cost of revenue. Purchase commitments more than doubling to $17.2B raise the off-balance-sheet exposure beside that inventory. The narrow gross-margin band since FY2016 (62.0% to 64.9%) is the mid-cycle stability that networking equipment can show when mix holds. The gross-margin ranges guide places that band next to peers.

How the Model Values This Kind of Company

Networking equipment is valued on product revenue through the cycle plus a recurring support-and-subscription line from the installed base (base times attach times revenue per unit). An order book can sit beside shipments: backlog covers next year's shipments, and book-to-bill is a memo check.

Gross margin is mix-weighted between product and recurring. Working-capital days matter because this kind of business often carries inventory rather than running a negative CCC. Purchase commitments sit beside inventory; terminal value uses mid-cycle free cash flow; stock pay is charged as a cost (material here at 6%).

What to Watch in the Financials

Subscription share of revenue. 50.5% in FY2026. Further gains thicken the recurring book; a stall leaves more revenue on product timing.

Purchase commitments. $17.2B from $7.6B. Rising commitments against inventory raise downturn exposure.

Cash conversion cycle and inventory days. 81 days CCC, 93 days DIO. Inventory builds ahead of demand are the early warning.

Stock pay as a share of revenue. 6.0%. The highest in the hardware set; it is the bridge from reported FCF to FCF after stock pay.

Key Risks

Inventory and commitments. 93 days of inventory plus $17.2B of purchase commitments leave a large stock and contract overhang if networking demand slows.

Product cycle timing. Even at 50.5% subscription, nearly half of revenue still tracks equipment refresh and project spend.

Stock-pay intensity for hardware. At 6.0% of revenue, equity compensation is a larger economic claim than at Dell (0.6%) or Amphenol (0.6%).

Gross margin band. Stability in the 62% to 65% range can break if mix shifts toward lower-margin product or if discounting intensifies.