Can Cisco Systems Avoid the Slumps Seen by IBM and Hewlett-Packard?

Cisco Systems (NASDAQ: CSCO  ) will release its quarterly report on Wednesday. The networking giant's shares have struggled in recent months after soaring earlier in the summer. With adverse sales trends hitting tech rivals IBM (NYSE: IBM  ) and Hewlett-Packard (NYSE: HPQ  ) , can Cisco really avoid the downward trend and post revenue growth?

The big challenge that many tech companies have seen lately is the slowdown in growth in formerly hot emerging markets like China and Brazil, which hit IT spending especially hard. Given that the U.S. economic recovery has been sluggish and that Europe has fallen back into recession, major tech players were relying on emerging-market growth to drive sales higher. The big question for Cisco investors is whether the company can buck the negative trend that IBM and Hewlett-Packard have set and find ways to keep growing. Let's take an early look at what's been happening with Cisco Systems over the past quarter and what we're likely to see in its report.

Stats on Cisco Systems

Analyst EPS Estimate

$0.51

Change From Year-Ago Earnings

6.3%

Revenue Estimate

$12.35 billion

Change From Year-Ago Revenue

4%

Earnings Beats in Past 4 Quarters

4

Source: Yahoo! Finance.

Will Cisco earnings live up to expectations?
Analysts have made small cuts in recent months to their expectations for Cisco's earnings, reducing full-year fiscal 2014 projections by 1% and 2015 calls by 2%. The stock has declined as well, dropping 10% since early August.

Most of Cisco's drop came in the aftermath of its previous earnings report in August. Despite a double-digit percentage increase in adjusted earnings and a better than 6% rise in revenue year over year, Cisco projected slower sales growth for the October quarter. Moreover, it announced a 5% workforce reduction, forcing investors to wonder if Cisco is going too far to try to boost profit margins and eliminate wasteful spending.

Yet the real challenge that Cisco faces is the same one that IBM and Hewlett-Packard have both struggled with: how to broaden their scope to encompass the entire IT services market. Enterprise solutions now encapsulate just about every aspect of clients' technology infrastructure, ranging from servers for virtual-computing environments that take advantage of cloud-based solutions to analytical tools to help business customers make best use of the information they collect on their respective client bases. Cisco risks being pulled in so many different directions that it loses focus on its core, lucrative networking business -- just as Hewlett-Packard lost its way with its hardware business and is now having to shift gears abruptly to compete.

Cisco isn't the only company having to deal with sluggish revenue. IBM saw year-over-year sales drop 4% in its third quarter, with emerging-market trends looking particularly ugly. Even though IBM and Hewlett-Packard have both been able to keep profits high, neither they nor Cisco can rely solely on efficiency gains to drive earnings growth.

One huge potential area for growth for Cisco could come from the continued push toward greater connectivity. With new innovations like wearable technology on the rise, Cisco will see greater demand for equipment to help keep devices interconnected, boosting sales in a key area for the company.

In the Cisco earnings report, watch to see if CEO John Chambers has a more optimistic outlook on the economy and the company's prospects. In past quarters, Chambers has often cast a negative light on Cisco's near-future results, and if he does so again, investors might once again send the stock downward.

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  • Report this Comment On November 11, 2013, at 10:00 PM, dav1949 wrote:

    I liked your article on Cisco very informative and very understandable. THANKS AGAIN

    David

  • Report this Comment On November 12, 2013, at 11:57 AM, TMFGalagan wrote:

    @dav1949 - Thanks - glad you liked it!

    best,

    dan (TMF Galagan)

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