What To Expect From Cisco Next Week

| About: Cisco Systems, (CSCO)

Investors who have been long Cisco Systems (NASDAQ:CSCO) will soon get the chance to find out whether the technology giant is turning the corner as the company reports earnings next week (February 8). Is CSCO searching for its old glory days or will it follow in the path of its competitors, Juniper Networks (NYSE:JNPR) and Brocade Communications (NASDAQ:BRCD), who have been disappointing their own investors?

Wall Street expects Cisco to earn 43 cents per share on $11.23 billion of revenues.

Here are five things investors should watch ahead of this report:

1. Insider activity. In spite of last quarter's improved results, there is no insider buying in the offing. According to data provided by yahoo.finance.com, the last insider transaction was reported on Dec 7, 2011, and it was a sale of 14,347 shares.

2. A bullish company chart. Cisco's stock price has decisively crossed both the 200 and 100-day moving average during a turbulent period for the market-and stay well-above the two averages throughout January.

3. Profit margins. According to the last report, overall margins dropped from 62.7% last quarter to 61.2% - well below the 63.9% two quarters ago. The slide in product margins confirms that the company is facing increasing competition from high-end competitors like IBM (NYSE:IBM), Alcatel-Lucent (ALU), Hewlett-Packard (NYSE:HPQ) and Juniper Networks, and low-end competition from Chinese players like ZTE Corporation and Huawei Technologies Co. and their bold strategy: Sell what Cisco sells at a deep discount and dispatch cheap labor for support. Nevertheless, the rise in the service margins confirms that the company is doing well in "bundling" traditional products that are increasingly turning into commodities with superior services.

4. The top line. In the last report, Cisco's top line was up 5% to $11.26 billion, exceeding analyst expectations - not bad for a mature $82 billion gorilla with 5.5 billion shares (the company reduced its outstanding shares by 100 million last quarter through buybacks) and tens of thousands of employees. The law of large numbers is, therefore, working against Cisco - though it didn't work against Apple (NASDAQ:AAPL). What was encouraging, however, was that revenue from new products increased by 7% - suggesting that Chambers' "One Cisco" strategy works. The bottom line should include "a number of unusual items," such as the recently announced layoffs.

5. 3. Innovation. Cisco seems to be shifting from an external to an internal innovation model that is more sustainable. But Chambers didn't give any details about this shift as there weren't any questions on this issue.

6. Guidance. Last time, the company gave an upbeat guidance (a 7% increase on the top line and a 3% increase on the bottom line) that exceeded analysts' estimates. Mr. Chambers was bullish on the company's prospects in Japan, and though he used the words "in times of limited spending," and "difficult macroeconomic environment," he avoided the use of words "challenging environment," uncertainty: and "unclear visibility."--watch whether these words we come back or completely eliminated.

The bottom line: Cisco techincals and fundamentals suggest that Cisco has turned the corner on the top line and innovation, and the market seems to like it. But don't expect the old glory days of the late 1990s. We reiterate our previous recommendation of the stock as a trading buy.

Disclosure: I am long CSCO.