What to Expect When Cisco Systems, Inc. Reports Earnings

Networking giant Cisco Systems (CSCO -0.52%) is set to report its second-quarter earnings after market close on Feb. 11. Cisco's first quarter reversed a trend of revenue declines that plagued the company for a full year, and analysts are now expecting it to post fairly robust revenue and earnings growth for the second quarter.

Along with the revenue and earnings figures, there are also some important areas of Cisco's business that investors should pay attention to. Here's what to expect when the company reports earnings.

What analysts are expecting
The average analyst expects Cisco to report 5.8% year-over-year revenue growth while growing its non-GAAP per-share earnings by about 8.5%. If Cisco hits these numbers, it would be a significantly better performance compared with the past four quarters.

Source: Cisco.

One wrinkle to be aware of is the effect of currency fluctuations on Cisco's revenue. Many other companies that have already reported earnings have seen a significant negative impact thanks to currency headwinds, and Cisco will probably be no different. This is a short-term issue, though, and revenue growth adjusted for currency will be the most relevant number for investors.

What investors should look for
There are two parts of Cisco's business that have been performing extremely poorly recently, even in the relatively strong first quarter. The first is the Asia-Pacific region, including China and Japan, or APJC. During the first quarter, while revenue grew both in the Americas and Europe, sales fell 12% year over year in APJC.

This struggle in emerging markets has been ongoing for some time now, and investors should look for any improvement during the second quarter. The company's conference call should provide an update on when Cisco expects these markets to return to growth.

Beyond geographical issues, Cisco's service-provider segment has been weak. During the first quarter, sales to service providers fell by 10%, while all other customer groups, in particular the public sector, grew. Solving this problem may take some time, as it depends on both growing capital expenditures from companies building out wireless networks and for those companies to continue using Cisco's products instead of cheap commodity hardware. I doubt we'll see much improvement in this area during the second quarter.

Beyond problem areas, Cisco has a few businesses that have been growing rapidly. Servers are one area where Cisco has managed to find success, and investors should look for continued growth. During the first quarter, the data center business accounted for about 5% of Cisco's revenue, but it grew by 15% year over year.

Cisco has very rapidly become the leader in the North American x86 blade server market and the No. 2 player worldwide. As x86 servers have become increasingly commoditized, Cisco has leveraged its leadership in networking to create a differentiated solution. This strategy is paying off, as the data center segment is one of the fastest-growing segments for Cisco.

The only segment growing faster is security, and this is another area investors should pay attention to. During the first quarter, security revenue grew by 25%, and Cisco has made some big acquisitions to boost its security business. In July 2013, Cisco paid $2.7 billion to buy Sourcefire, and since then it's also acquired smaller cybersecurity firms ThreatGRID and Neohapsis.

There are plenty of players in the cybersecurity market, and more acquisitions are probably inevitable. But Cisco has the advantage of having existing relationships with a large number of enterprise customers, and that's worth an awful lot.

High expectations are being placed on Cisco, and there's a real chance that the company will come up short of what analysts are expecting. These estimates aren't all that important, though; what matters is whether Cisco's problem areas improve, and whether its growth businesses continue to perform well. Everything else is just noise.