Waiting for Cisco

After the bell Tuesday, Cisco Systems will report earnings for its fourth fiscal quarter ended Jan. 31. Usually, investors look forward to reading a Cisco earnings report. But this time, it is a report the markets are dreading.

This is in part due to Cisco CEO John Chambers' recent comments about the impact the slowing economy is having on the company's results. Chambers' strategy has been to set low expectations for investors before the company's earnings release and conference call Tuesday - a wise move, because no matter what the results, it will be a big day for other major technology companies, too. "It is the best macroeconomic indicator for the enterprise market," says Seth Spalding, a senior telecommunications analyst at Epoch Partners in San Francisco. Demonstrating the market's nervousness about the report, Cisco shares slipped Monday by 88 cents, or 2.5 percent, to $34.63.

The Wall Street consensus, according to First Call/Thomson Financial, is that the company is going to earn 19 cents a share, with revenues in the vicinity of $7.2 billion. Wall Street will be very interested to hear about Cisco's outlook going forward: Some observers expect the company to guide forecasts lower. The question is, by how much.

"Everyone is expecting a reduction," Spalding says. "They will make the numbers for this quarter, but even if they lowered their growth rate to 30 or 40 percent, most people wouldn't be surprised."

Steve Kamman, executive director of networking and Internet infrastructure research at CIBC World Markets, thinks the company has two choices. "They can say the sky is falling and cite the larger slow down, like Corning did," he says. "Or they can go the Nortel route and say things will be OK again in the third and fourth quarters. I think they will go with the latter."

Although Cisco's numbers will in some way reflect the overall state of corporate IT spending, they also show the impact of Cisco's competitors - Juniper Networks (JNPR) , for instance, has been nibbling away market share from Cisco.

Cisco's biggest challenge is to transition from the enterprise market to the higher-growth telco market. There, the company will compete with incumbent giants such as Nortel and Lucent. Cisco is known for its acquisition-based strategy, but none of its recent acquisitions have made a footprint in the telecom market.

"It may be tougher to penetrate the optical portfolio, but that is what it all comes down to," says Spalding.

If Cisco can't change gears, the giant will have more challenging days ahead.

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