Investors who have been long Cisco Systems (CSCO) will soon get the chance to find out whether the technology giant is turning the corner as the company reports earnings this week. Is CSCO searching for its old glory days or will it follow in the path of its competitors, Juniper Networks (JNPR) and Brocade Communications (BRCD), who have been disappointing their own investors?
Wall Street expects Cisco to earn $1.49 cents per share on $11.01 billion of revenues.
Here are five things investors should watch ahead of this report:
- The company chart. Cisco’s stock price has decisively crossed both the 200 and 100-day moving average during a turbulent period for the market. Will the price continue staying above the two averages and eventually drive the 100-moving average above the 200-day moving average (click to enlarge image)? Click to enlarge
- Profit margins. In the last report, the company’s margins were a bit disappointing, especially on the product side. Overall margins dropped from 63.9 percent down to 62.7; product margins slid from 63.1 to 61.2 percent, while service margins increased from 67 percent to 68.6 percent. The slide in product margins confirms that the company is facing increasing competition from high-end competitors like International Business Machines (IBM) Alcatel-Lucent (ALU), Hewlett-Packard (HPQ) and Juniper Networks; and low end competition from Chinese players like ZTE Corporation (Shenzhen- 000063) and Huawei Technologies Co. Their bold strategy: Sell what Cisco sells at a deep discount and dispatch cheap labor for support. At any rate, a decline in the margin slide or a turnaround will be a sign that a company has managed to fend-off these threats.
- The top line. In the last report, Cisco’s top line was up 3 percent to $11.2 billion, exceeding analyst expectations — not bad for a mature $82 billion gorilla with 5.5 billion shares and tens of thousands of employees. The law of large numbers is, therefore, working against Cisco — though it didn’t work against Apple Inc. (AAPL). What was encouraging, however, was that revenue from new products increased by 7 percent — suggesting that Chambers' “One Cisco” strategy works. Let’s hope that this trend will continue.
- Innovation. Cisco seems to be shifting from an external to an internal innovation model that is more sustainable. Will Chambers give any details about this shift?
- Guidance. Though in the last earnings conference call Mr. Chambers used the words “difficult” and “problematic” a few times, he avoided the use of such words as “challenging environment,” uncertainty,” and "unclear visibility", especially when it comes to one of Cisco’s largest customers, the Federal and state government. Will he provide a better picture this time?
The bottom line: Cisco seems to have turned the corner on the top line and innovation, and the market seems to like it. We reiterate our previous recommendation of the stock as a trading buy.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CSCO over the next 72 hours.