R. Scott Herren
Executive Vice President and Chief Financial Officer at Cisco Systems
Thanks, Chuck. Q2 was a strong quarter across the business. We executed well, delivering our third consecutive quarter of more than 30% product order growth driven by strength across our portfolio, including continued robust demand for our products and services, along with disciplined spend and supply chain management. Total revenue increased by $760 million to $12.7 billion, up 6% year-over-year in line with our guidance range for the quarter. We saw strength in a number of product areas and across all of our geographies. Our business performed well and is highly dynamic and supply constrained environment which as Chuck said continues to hinder our ability to convert the significant demand we have in the revenue.
Overall profitability in Q2 was strong with non-GAAP operating margin of 34.3%, non-GAAP net income of $3.5 billion and non-GAAP earnings per share of $0.84, with non-GAAP earnings per share coming in above the high end of our guidance range. Looking at our Q2 revenue in more detail, total product revenue was $9.4 billion, up 9%; service revenue was $3.4 billion, down 1%, driven by delays in hardware support contracts related to the supply constraints. Within product revenue, Secure, Agile Networks performed well with revenues up 7%. Switching had solid growth driven by a double-digit increase in data center switching, driven by our Nexus 9000 products. Campus switching had solid growth led by our Catalyst 9000 and Meraki Switching offerings. Wireless had very strong double-digit increase driven by our WiFi 6 products and our Meraki wireless offerings. We also saw double-digit growth in compute revenue driven by servers.
Enterprise routing declined primarily driven by Access slightly offset by strength in SD WAN. Hybrid Work, which is where we report just our collaboration portfolio was down 9% driven by declines in our collaboration devices and meetings offerings, partially offset by the continued ramp of our communication platform as-a-service. Beginning next quarter, the name of this category will change from hybrid work to collaboration, there will not be any changes to the components within this category.
End-to-end security grew 7%, with broad strength across most of the portfolio. Our zero trust portfolio performed well with double-digit growth, driven by strong performance in our Duo offerings. Our subscription portfolio continued to perform well, driven by cloud security and zero trust. Internet for the Future was up 42%, driven in large part by the strength of our web scale customers. We saw broad strength in the portfolio with growth in edge, driven by double-digit growth from our ASR 9000 offerings and core with strength in Cisco 8000 and optical. We also saw continued strong contribution from Acacia, our optical networking offerings. Optimized application experiences was up 12% driven by double-digit growth in both ThousandEyes and Intersight. SaaS revenue for AppDynamics grew mid-single digits with the continued shift to its cloud delivered platform.
We continue to make progress on our transformation metrics as we shift our business to more software and subscriptions. Software revenue was $3.8 billion, an increase of 6% with the product portion up 9%. 80% of software revenue was subscription-based, which is up 4 percentage points year-over-year. Total subscription revenue was $5.5 billion, an increase of 7%. Total subscription revenue represented 44% of Cisco's total revenue. Annualized recurring revenue or ARR was $21.9 billion, an increase of 11% with strong product ARR growth of 20%. And remaining performance obligations or RPO was $30.5 billion, up 8%. Product RPO increased 16%, service RPO increased 3% and the total short-term RPO grew 8% to $16.3 billion.
As a reminder, the short-term portion will convert to revenue over the next 12 months. Relative to acquisitions, there was an approximate 200 basis point year-over-year positive impact on Q2 revenue growth and no material impact on our non-GAAP EPS, which is in line with our expectations. We continue to have exceptionally strong order momentum in Q2. Total product orders grew 33% with strength across the business. Looking at our geographic segments, the Americas was up 36% and EMEA and APJC were both up 30%. Total emerging markets were up 39% with the BRICS plus Mexico up 48%. In our customer markets, service provider was up 42%, enterprise was up 37%, commercial was up 30% and public sector was up 20%. As you can see, it was broad strength across our geographies and customer markets.
From a non-GAAP perspective. Total gross margin came in at 65.5% down 140 basis points year-over-year. Product gross margin was 64.3%, down 230 basis points and service gross margin was 68.8%, up 90 basis points. The decrease in product gross margin was primarily driven by ongoing higher component costs related to supply constraints as well as higher freight and logistics costs. As we've been discussing for several quarters, we continue to manage through the supply constraints seen industrywide by us and our peers due to component shortages, which have resulted in extended lead times and higher supply costs.
The situation remains challenging, we continue to partner closely with our key suppliers, leveraging our volume purchasing and extended supply commitments as we address the supply challenges and cost impacts, which we expect will continue into the second half of our fiscal 2022. As I mentioned, the component supply constraints also slow the conversion of our strong demand into revenue. This has resulted in a substantial increase and continued build in our backlog levels, well beyond our normal historical levels. Additionally, the ongoing supply constraints have not only impacted our ability to ship hardware, but also impacts our delivery of software such as subscriptions to customers order with the hardware. That undelivered software is also included in backlog until the hardware ships [Phonetic] which is when we begin to recognize the revenue. Of course, this impacts our software revenue growth and other related metrics.
To give you a sense of scale of our backlog, our Q2 ending product backlog was more than $14 billion, an increase of more than 150% year-on-year. Within that amount, software backlog almost doubled to more than $2 billion. Keeping in mind that backlog is not included as part of our $38.5 billion in remaining performance obligations. We ended Q2 with total cash, cash equivalents and investments of $21.1 billion; operating cash flow for the quarter was $2.5 billion, down 17% year-over-year, primarily driven by advanced payments to secure future supply. These advanced payments had a negative 17% year-over-year impact on operating cash flow. Additionally, we made a tax payment of approximately $100 million this quarter, which had been deferred as a result of the CARES Act. This payment had an additional negative 4% year-over-year impact on our operating cash flow.
In terms of capital allocation, we returned $6.4 billion to shareholders during the quarter. It was comprised of $4.8 billion of share repurchases and $1.5 billion for our quarterly cash dividend. Given the confidence we have in our business today and into the future, our Board has authorized an additional $15 billion for share repurchases, bringing the total to approximately $18 billion. We are also raising our dividend by $0.01 to $0.38 per quarter, which represents our 12th increase. Combination of our dividend increase, additional share repurchase authorization and higher share repurchases during the quarter demonstrates our commitment to returning excess capital to our shareholders and our confidence in the stability of our ongoing cash flows.
We continue to invest organically and inorganically in our innovation pipeline. We closed the acquisition of Reflex in Q2 and Opsani in early Q3 to enhance our full stack observability offerings. These investments are consistent with our strategy of complementing our internal innovation in R&D with targeted M&A to allow us to further strengthen and differentiate our market position and our key growth areas.
To summarize, we had another good quarter with robust product demand and solid execution and a complex supply constrained environment. We continue to make progress on our business model shift and are making the investments in innovation to capitalize on our significant growth opportunities and expanding addressable markets. We're seeing progress as we drive the continued shift to more software and subscription revenue delivering growth and driving shareholder value. Now let me provide our financial guidance for Q3. As a reminder, the third quarter of last year included an extra week, which was a benefit to total revenue of approximately 3 points of growth. The total impact on our cost of sales and operating expenses was approximately $150 million and this translated into a $0.04 benefit to earnings per share in our Q3 of last year.
For next quarter, we expect revenue growth to be in the range of 3% to 5%. We anticipate non-GAAP gross margins to be in the range of 63.5% to 64.5% reflecting the continuing increase in supply chain costs we're incurring as we protect shipments to our customers. Our non-GAAP operating margin is expected to be in the range of 32.5% to 33.5%. Non-GAAP earnings per share is expected to range from $0.85 to $0.87.
For the full year fiscal '22, we are tightening the range as follows. We expect revenue growth to be in the range of 5.5% to 6.5% year-on-year. Non-GAAP earnings per share is increasing to $3.41 to $3.46, up 5.9% to 7.5% year-on-year. In both our Q3 and full year guidance, we're assuming a non-GAAP effective tax rate of 19%.
I'll now turn it back to Marilyn, so we can move into the Q&A.
