Cisco Earnings: Can the Networking Giant Bounce Back?

Cisco Systems (CSCO +13.36%) will release its quarterly report on Wednesday, and investors in the networking giant are starting to get some of their confidence back after a tough few months. Yet like competitors IBM (IBM 2.09%) and Hewlett-Packard (HPQ +0.85%), Cisco has had a tough time trying to maintain revenue growth and avoid sales contractions, and the company expects to see those headwinds not just this quarter but in future quarters as well.

Cisco continues to try to broaden its scope, fighting with IBM, HP, and other companies in order to take advantage of the hottest areas of the tech sector in today's market. With emphasis on cloud computing, enterprise information-technology consulting, and other high-margin areas, Cisco hopes to boost its profits while leveraging its historical expertise in the networking-equipment sector. Yet its competitors are making similar moves, forcing Cisco to defend its turf at the same time that it advances to capture new opportunities. 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.

Cisco CEO John Chambers. Source: Cisco.

Stats on Cisco Systems

Source: Yahoo! Finance.

How long will Cisco earnings decline?
In recent months, analysts have reined in their views on Cisco earnings, cutting $0.06 per share from their January-quarter estimates and double that from their full-year fiscal 2014 projections. The stock has stayed roughly flat since early November, bouncing back from big losses early on.

Most of those losses came after Cisco's previous quarterly earnings report, which sent the stock down 12% in a single day. Cisco managed to post better earnings than investors had expected, but the company missed revenue expectations for the second quarter in a row. Moreover, the company gave guidance that revenue would fall year-over-year, and in particular, weakness in emerging markets and the service-provider industry point to the possibility that Alcatel-Lucent (NYSE: ALU) or other rivals took away some business that Cisco might normally have won.

But the real damage was done in December, when Cisco made a change not just to single quarterly guidance but to long-term strategic growth goals. Specifically, CFO Frank Calderoni reduced his long-term sales growth expectations from a range of 5% to 7% to a lower range of 3% to 6%. At the same time, CEO John Chambers explained the difficulties of fighting Alcatel-Lucent, Huawei, and Juniper Networks in specific equipment-related areas.

Still, bullish investors have high hopes for Cisco. A Barron's article last month stressed the fact that threats like software-defined networking are still years away, giving Cisco time to adapt its offerings to require proprietary hardware while still offering cost savings for enterprise customers. Moreover, with valuations that make even relatively cheap competitors look expensive by comparison, Cisco has a big margin of safety even if things don't go as well as it hopes.

One huge strategic move for Cisco could come from its recent cross-licensing agreement with Samsung, which also includes by extension Google technology as well. The trio should be able to create unique combinations of technology offerings that include expertise in network security, mobile technology, and broad-based electronics research. As other major tech players also partner up, Cisco wants to have the right team in place to move forward aggressively.

In the Cisco earnings report, watch to see if the company can finally plot a course toward growing revenue once again at a more impressive pace. Without growth, investors will keep doubting Cisco's future.

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