Cisco’s FY2025 Q2: High-60s gross margins and $2.0bn free cash flow, but a sub-1 current ratio keeps pressure on the balance sheet

Cisco’s fiscal Q2 2025 results were unambiguous at the headline level: $13.991 billion in revenue, $2.428 billion in net income, and GAAP diluted EPS of $0.61, according to the company’s Form 10-Q filed February 18, 2025 (for the period ended January 25, 2025). Gross profit of $9.111 billion translated into a gross margin of about 65.1%, with operating income of $3.113 billion yielding an operating margin just over 22.2%—evidence that pricing, product mix, and cost controls collectively anchored profitability despite volatility in hardware demand. The company’s diluted share count for the quarter was approximately 4.005 billion, continuing a gradual downtrend from fiscal 2024, SEC filings show.

Cisco’s margin structure appears resilient. At 65.1%, Q2 gross margin mirrored Q1 FY2025’s 65.9% and was marginally higher than the prior-year levels around 64%–65%, based on Financial Modeling Prep’s ratio series derived from SEC filings. Operating margin in Q2 (22.25%) is also consistent with the company’s steady margin management through the past several quarters. The balance of R&D intensity—running near the mid-teens as a share of revenue—and sales and marketing plus G&A (about 24%–25% of revenue when combined under SG&A) has remained structurally stable, according to Financial Modeling Prep’s quarterly metrics; this is consistent with a large, mature platform business that is investing in software, security, and observability while continuing to monetize its installed base.

On the top line, the Q2 print was essentially level with Q1 FY2025 ($13.841 billion) and the subsequent Q3 FY2025 ($14.149 billion), reinforcing a narrative of stabilization after a period of demand digestion and backlog normalization post-supply-chain catch-ups. While several sell-side commentaries around the time of Splunk’s close argued that observability and security could accelerate mid-term revenue growth, the reported GAAP revenue cadence in FY2025 thus far points to consolidation of gains rather than a pronounced inflection. That said, a still-strong gross margin suggests the revenue mix is skewing toward higher-value offerings or that the company is offsetting hardware headwinds through pricing discipline and services subscriptions.

In the absence of publicly disclosed Remaining Performance Obligations (RPO) in the quarterly snapshots available here, deferred revenue is a practical—though incomplete—indicator of the health of Cisco’s subscription and services transition. According to SEC filings, current deferred revenue in Q2 FY2025 stood at $15.999 billion, with non-current deferred revenue at $11.796 billion, totaling roughly $27.795 billion. That compares with $27.502 billion in Q1 FY2025 and $28.475 billion in Q4 FY2024—broadly stable within a $27.5–$28.5 billion band over the last several quarters. The steadiness of deferred revenue implies renewed software/services billings are largely replacing revenue recognition, supporting the thesis that Splunk and the security/observability layers are integrating into a recurring-revenue backbone.

However, interpreting flat deferred revenue requires caution. One camp argues stability itself is a positive: in a choppy macro, maintaining the book is a sign of subscription durability and solid renewals. Another camp counters that deferred revenue should climb in absolute terms if cross-sell motions from Splunk and security are truly accelerating. The available data suggests momentum, not acceleration. To be fair, integration synergies and go-to-market motions can take several quarters to manifest in billings, especially across heterogeneous customer bases where Splunk’s observability footprint must be mapped onto Cisco’s networking/security channels.

It also matters that hardware cycles are normalizing from post-pandemic extremes. Several independent market analyses at the time highlighted the unwinding of hardware backlogs as a headwind to year-over-year revenue growth, even as lead times improved. Cisco’s stable gross margin in Q2 FY2025 implies that any hardware moderation was balanced by mix benefits and software/services contribution. The net effect is a revenue base that may be better insulated against hardware shocks but is not yet demonstrating the steep sequential uplift that some bullish narratives anticipated earlier in the integration timeline.

Q2 FY2025 operating cash flow of $2.241 billion and free cash flow of $2.031 billion underscore Cisco’s enduring cash-generation capacity, according to SEC filings. The quarter’s free cash flow represented roughly 14.5% of revenue, consistent with a business that throws off substantial cash even without outsized top-line growth. Over the preceding Q1 FY2025, operating cash flow was $3.661 billion and free cash flow $3.444 billion; in Q3 FY2025, operating cash flow rose to $4.057 billion and free cash flow to $3.796 billion—signs of robust conversion even as revenue trends remained contained.

On quality, Financial Modeling Prep’s income quality and coverage metrics provide additional texture. For Q2 FY2025, interest coverage sat at approximately 7.7x, with debt-to-equity around 0.68 and net debt to EBITDA in the mid-5x range. Those figures fall within the company’s historical comfort band but bear watching in a higher-for-longer rate environment. Stock-based compensation (SBC) was close to $921 million in Q2 FY2025, per SEC filings, echoing the scale seen in recent quarters. While SBC is standard for large technology platforms, the magnitude remains material relative to net income and free cash flow. Investors should evaluate the balance between continued SBC issuance and the pace of buybacks, particularly as Cisco leans on equity to retain talent and harmonize Splunk’s workforce incentives.

Cisco’s cash conversion cycle also merits mention: Financial Modeling Prep’s analysis indicates a Q2 FY2025 cash conversion cycle of about 75 days, improving to roughly 63 days in Q3 FY2025. That sequential improvement—driven by modest gains in receivables/payables and inventory turns—supports the notion that operational normalization is ongoing. The company’s capex remained modest at roughly 1.5% of revenue in Q2 and around 1.8% in Q3, reinforcing that most investment is opex-heavy (R&D, go-to-market) rather than capex-intensive. For long-term holders, the question is less about capex efficiency and more about whether the mix shift toward software and observability can expand recurring free cash flow per share faster than potential dilution from SBC.

Cisco’s liquidity posture is the most nuanced element of the FY2025 picture so far. In Q2 FY2025, the current ratio was approximately 0.87, with a working capital position of about negative $5.34 billion, per Financial Modeling Prep’s construction from Cisco’s balance sheet. By Q3 FY2025, the current ratio improved closer to 0.95 and working capital to roughly negative $1.68 billion, as payables, short-term debt, and deferred revenue dynamics shifted. Total debt edged lower from about $31.99 billion in Q1 FY2025 to $31.04 billion in Q2 and $29.28 billion by Q3, while cash and short-term investments stepped down from roughly $18.67 billion in Q1 to $16.85 billion in Q2 and $15.64 billion in Q3. The directional trend—less debt, less cash—coexists with a sub-1 current ratio, putting a premium on stable cash generation and access to capital markets.

Shareholder returns remain sizable. In Q2 FY2025, Cisco paid roughly $1.593 billion in dividends and repurchased approximately $1.075 billion of stock—about $2.67 billion returned that quarter, SEC filings show. In Q3 FY2025, cash returns were even higher: about $1.627 billion in dividends and $2.415 billion in buybacks (roughly $4.04 billion total), alongside $1.672 billion of debt repayment. That cadence signals management’s confidence in recurring cash flows; however, in a world of higher funding costs, investors should recognize that aggressive returns and sub-1 current ratios require consistent operating execution.

The Splunk acquisition’s accounting footprint remains visible. Goodwill and intangible assets collectively sit near the high-$60 billion range ($68.858 billion in Q2 FY2025 and $68.667 billion in Q3 FY2025), representing more than half of total assets. That concentration raises familiar questions about impairment risk if growth assumptions for observability/security are not met. To be clear, there’s no evidence in the filings of imminent impairment pressure; the point is that the bar for synergy realization remains meaningful when intangibles are this large a share of the balance sheet.

As of mid-August 2025, Cisco shares trade near the low-$70s, with a 52-week range around $47.85 to $72.55, according to Yahoo Finance market data. On Financial Modeling Prep’s framework, the company’s Q3 FY2025 snapshot showed a price-to-earnings multiple near 22.7x GAAP EPS, price-to-sales around 16.0x, price-to-free-cash-flow near the high-50s, and a dividend yield around 0.7%. The enterprise value-to-EBITDA multiple in the low-60s is elevated versus historical norms for hardware-weighted franchises, reflecting the market’s belief that Cisco is more software-and-services than it used to be—and that the observability and security layers will drive mix and margin resilience.

Skeptics point out that such multiples demand seeing sustained software-led growth or at least consistent expansion in recurring revenue metrics (billings, RPO, net revenue retention). The deferred revenue stability described earlier supports the resilience argument but does not, by itself, validate a premium multiple. Bulls counter that steady gross margins, improving cash conversion in Q3, and a robust buyback/dividend program backstop the equity while Splunk cross-sell gathers steam. Both views agree on one thing: the stock’s range-bound behavior over the last month suggests the market is waiting for clearer data on growth acceleration, not questioning Cisco’s profitability or balance sheet solvency.

The swing factors to watch are product mix (how fast observability/security scale inside the revenue base), renewal rates in software, and any signaling from management about billings momentum and pipeline health. If those indicators firm up in the seasonally stronger second half of the fiscal year, the current valuation could prove defensible; if they do not, multiple compression is the obvious risk.

Cisco’s R&D spend hovered around $2.299 billion in Q2 FY2025 (roughly 16.4% of revenue) and $2.335 billion in Q3 FY2025 (about 16.5%), according to Financial Modeling Prep’s breakdown of the company’s income statements. SG&A (including sales and marketing plus G&A) ran roughly $3.424 billion in Q2 and $3.463 billion in Q3. The result is a consolidated opex envelope in the low-$6 billion range each quarter. Opex steadiness, combined with high-60s gross margin, sustains low-20s operating margins in quarters without transitory items.

Strategically, this opex profile signals that Cisco is financing its software pivot primarily through the P&L rather than capex, an approach that keeps free cash flow structurally high but requires opex discipline to preserve margins as the revenue mix evolves. The central tension for the next 12–18 months is whether the observability and security stack (aided by Splunk) can deliver sustained growth without dramatic increases in go-to-market outlays. If the cross-sell motion is efficient—leveraging Cisco’s channel reach without duplicative spending—operating margins can remain healthy while subscription revenue compounds. If not, margin pressure will emerge from either incremental sales expense or slower growth forcing greater promotional intensity.

Hardware remains integral, but its role is shifting toward platform anchoring rather than pure growth. With backlog normalization and more predictable lead times, the company’s hardware revenue should be more aligned with underlying demand rather than supply-chain variability. That should reduce volatility, but it also means the growth baton must be carried by software/services. In that regard, the steady deferred revenue base is encouraging, but investors will want to see explicit software KPIs (billings, ARR, RPO) to calibrate the pace of transformation.