Does an article on Cisco Systems (NASDAQ:CSCO) even require an introduction? The networking equipment maker reports its fiscal Q2 2007 numbers on Tuesday.

What analysts say:

  • Buy, sell, or waffle? Thirty-one analysts follow Cisco. Twenty-two of them rate the stock a buy, seven more a hold, and the last two say sell.
  • Revenues. On average, they expect to see sales rise 25% to $8.28 billion.
  • Earnings. Profits are predicted to follow more slowly, rising 19% to $0.31 per share.

What management says:
Tech legend and Cisco CEO John Chambers termed last quarter's results "strong," highlighting "record results from a revenue, net income and earnings per share perspective." (Actually, those are three perspectives, but who's quibbling?) According to Chambers, the market has hit an "inflection that is changing the landscape of networking, and we believe the network is becoming the platform for the next generation of IT."

Sounds good to me, and the firm's near-doubling of free cash flow production tells us that these are more than mere words -- that there's boatloads of cash coming onto the balance sheet to back up its story. (Speaking of which, when calculating free cash flow for this serial acquirer of complementary businesses, I will be modifying the standard definition slightly. I'm considering free cash flow to equal operating cash flow minus both capital expenditures and monies spent to acquire new businesses. Under that definition, Cisco generated $1.1 billion in free cash flow in Q3 2005, and $1.9 billion in Q3 2006.)

What management does:
Remember those cash flow numbers, folks, as you review the table below. Gross, operating, and net margins may all be dropping, but cash still flows strongly from this business.

Margins

7/05

10/05

1/06

4/06

7/06

10/06

Gross

67.2%

67.5%

67.7%

67.3%

66.4%

65.5%

Operating

30.0%

29.9%

29.9%

29.4%

28.8%

28.2%

Net

23.1%

22.1%

21.5%

20.6%

19.6%

19.7%
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Not being a certified "techie" myself, I admit that I find most of what Cisco makes goes entirely over my head. But there's one aspect of its business I do have hands-on experience with: digital video recorders, a market that Cisco bulldozed into with its 2005 acquisition of DVR market-leader Scientific-Atlanta.

So before closing out this Foolish Forecast on Cisco's Q4 report, I just want to point out one thing in Cisco's Q3 report: The Scientific-Atlanta deal is paying off in spades. According to the report, management qualified its revenue gains by pointing out that $584 million of its revenues were "inorganic," derived from its new Scientific-Atlanta subsidiary. For the record, that represented roughly 19% year-over-year sales growth for the division, or about twice the growth rate S-A was achieving pre-Cisco.

Moral of the story: It pays to have a big, smart backer. And to be one.

Competitors:

  • 3Com (NASDAQ:COMS)
  • Alcatel-Lucent (NYSE:ALU)
  • Avaya (NYSE:AV)
  • Ciena (NASDAQ:CIEN)
  • Nortel (NYSE:NT)
  • Siemens (NYSE:SI)

Fool contributor Rich Smith does not own shares of any company named above.