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There have been the best and the worst times to report earnings for Cisco Systems (NASDAQ:CSCO). The best time was back in the late 1990s, the dot.com era, when every earnings report was a good earnings report. The worst time is in the middle of the on-going correction when every earnings report could turn out to be a bad earnings report, especially after a string of disappointing earnings reports by the company itself and by its competitors, Juniper Networks (NYSE:JNPR) and Brocade Communications (NASDAQ:BRCD)—Wall Street expects Cisco to earn 32 cents on $10.97 billion of revenues.

Investors should be looking for a number of clues to determine whether the company is turning the right or the wrong corner:

  1. Profit margins . A further slide in profit margins will confirm that the company is facing increasing competition from high-end competitors like Alcatel-Lucent (ALU ), Hewlett-Packard (HPQ ), and Juniper Networks (JNPR ); a low end completion from Chinese players like ZTE Corporation (Shenzhen- 000063) and Huawei Technologies Co.; and their bold strategy: Sell what Cisco sells at a deep discount, and dispatch cheap labor for support.
  2. The top line . As is the case with other high-tech survivors of the high-tech bubble, Cisco isn't the emerging $200 million small company any more, with a few millions of shares and a few hundreds of employees, but a mature $82 billion gorilla with 5.5 billion shares and tens of thousands of employees. The law of large numbers may, therefore, work against Cisco—though it didn’t work against Apple Computer (NASDAQ:AAPL). Nevertheless, a slow-down in revenue growth, especially revenue from new products to determine whether Chambers “One Cisco” strategy works; the bottom line should include “a number of unusual items,” such as the recently announced layoffs.
  3. Innovation Strategy. Investors should look for clues on Cisco’s product pipeline, and innovation strategy. Though the company has been a big spender on innovation, it has yet to come up with blockbuster products that will create an entirely new product category—the company has also been relying on strategic acquisitions for new product development—a strategy that has been proven too costly to continue.
  4. Guidance. Watch how many times Mr. Chambers will use the worlds “challenging environment,” uncertainty,” “unclear visibility", especially when it comes to one of the Cisco’s largest customer, the federal and state government.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CSCO over the next 72 hours.

Source: Cisco Systems Earnings Preview: What Investors Should Look For