Cisco Systems, Inc. Earnings: Will Revenue Ever Recover?

On Wednesday, Cisco Systems (CSCO 0.67%) will release its quarterly report, and once again, investors expect that the networking giant will see its revenue drop. So far, Cisco has been able to keep its profits relatively stable despite the declines in sales, but with ongoing competition from IBM (IBM -0.89%) and Oracle (ORCL -2.25%) to capture enterprise customers and offer them the widest possible range of products and services -- including those related to networking -- the question Cisco Systems faces is whether it can sustain its leadership role in networks while expanding to serve a greater portion of its clients' overall IT needs.

Cisco Systems has struggled for a long time, as it seeks to reinvent itself. At the dawn of the Internet, Cisco was the darling of the tech boom, with the limitless possibilities of networking lying before the company. But some strategic missteps left Cisco vulnerable to competition, and players both large and small took advantage, leaving Cisco with the challenge of recapturing at least part of its former glory. Let's take an early look at what's been happening with Cisco over the past quarter and what we're likely to see in its report.

Barclays Center. Source: Cisco Systems.

Stats on Cisco Systems

Source: Yahoo! Finance.

Will Cisco earnings hold up with less revenue?
Investors have actually been a bit more optimistic about the long-term prospects for Cisco earnings, with full-year fiscal 2014 estimates rising by a penny per share and next year's projections up by triple that amount. The stock has stayed stuck in neutral, though, rising less than 2% since early February.

Cisco's fiscal second-quarter earnings report back in February continued its string of weak sales, as revenue fell by nearly 8%. Yet investors were actually pleased with those results, as they were a bit better than the company's previous guidance for the quarter. Moreover, some positive signs emerged from the report, as Cisco's enterprise and commercial business in the U.S. saw orders jump by double-digit percentages. Emerging markets also bounced back somewhat, with declines of just 3% marking dramatic improvement from the 12% decline in the fiscal first quarter.

Source: Cisco Systems.

But Cisco Systems realizes the need to go beyond business as usual if it wants to match up to Oracle and IBM. Cisco's plan to spend $1 billion on its Cisco Cloud Services concept has great potential to transform the company's overall business if it can distinguish itself from the many other companies seeking to make cloud-computing offerings to enterprise customers. In particular, given the price war in the basic cloud services niche, Cisco needs to develop a higher-level premium product if it wants to win customers and avoid the commoditized pricing that will prevent even a successful launch from suffering from razor-thin profit margins.

High-profile projects might go a long way toward reestablishing Cisco's dominance in connectivity and fending off Oracle and IBM. One big challenge it has successfully tackled is to make professional sports stadiums Wi-Fi friendly, with the Barclays Center basketball arena in Brooklyn sporting unparalleled connectivity for tens of thousands of fans. A number of other baseball and football venues have also used Cisco to improve their Internet availability and make them more attractive to younger fans.

The Internet of Things is another big area in which Cisco expects to go head-to-head with IBM and Oracle. As interconnected products start giving users the ability to collect and analyze data, Cisco hopes not only to make that connectivity possible but also help secure it from outside interference. As part of the Industrial Internet Consortium with IBM and other tech giants, Cisco is trying to establish standards for the broader industry, but Cisco also has an opportunity to further its own ends with proprietary solutions if the consortium fails to meet its cooperative goals.

In the Cisco earnings report, watch to see how well the networking giant does in broadening its appeal with a wider set of products and services. With IBM and Oracle breathing down its throat, Cisco Systems needs to demonstrate its ability to innovate in a dog-eat-dog tech world.

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