In August, Cisco CEO John Chambers saw "unusual uncertainty" among IT buyers. Chambers also disappointed Wall Street with its outlook in November due a slowdown in government spending. The big question is whether Cisco's fiscal second quarter earnings on Wednesday will complete a trilogy of disappointment.
Cisco is expected to report second quarter earnings of 35 cents a share on revenue of $10.23 billion.
Three months ago, Cisco sounded a few IT spending alarm bells, but other tech giants said the challenges were specific to the networking giant.
With that backdrop, all eyes will be on Cisco's quarter, outlook and Chambers' tea leaves. Is it time to scream "all clear"?
Analysts aren't so sure. Here are the items to watch:
Cisco's order book. A few analysts noted that Cisco was deliberately conservative three months ago so it could rebuild its order backlog. Indeed, other networking players---Juniper Networks, Riverbed and Polycom---note that demand has been strong. Jason Ader, an analyst at William Blair, said in a research note:
The order book needed to be rebuilt after a large bookings shortfall in the October quarter (of $500 million) and sluggish bookings in the July quarter. Beyond issues with the cable set-top-box business and state and local government spending, we attribute a good portion of the order softness to over-ordering by Cisco customers in early calendar 2010 as a reaction to stretched lead times at the end of calendar 2009. That is, in the second half of calendar 2009, as our channel checks at the time indicated, customers were faced with infrastructure shortages as post-recession lead times for many Cisco products stretched from weeks to months.
Can HP ding Cisco margins? Many analysts have noted that HP is ramping its efforts to be more relevant in networking. HP may be guaranteeing margins to resellers to gain share.
What's the portfolio mix? Set-tops are going to be a drag this quarter, but telepresence, Unified Computing Systems and Starent are expected to be strong. Brian Modoff, an analyst at Deutsche Bank, writes:
We remain cautious about campus switching, legacy routing and set-tops. We believe investors remain skeptical about Cisco's ability to return to the 12%-17% growth rate it once found achievable. It appears unlikely that the new products can grow fast enough to offset declines in the legacy products this year.
Switch sales. One third of Cisco's sales come from network switches. Some analysts have suggested that switch sales are the most economically sensitive items in Cisco's portfolio. And improving economy could boost Cisco over the next year. Switching gear is why Chambers spends a lot of time talking about macroeconomics.