Cisco Systems is on deck to deliver its fiscal second quarter results Wednesday and analysts are upbeat about the company's prospects. The rub: Supply constraints may have put a lid on Cisco's revenue.
Analysts expect Cisco to report second quarter earnings of 35 cents a share on revenue of $9.4 billion, according to Reuters Thomson. Gross margins are projected to be at 64.84 percent. In recent days, estimates have been creeping higher.
The bottom line: Cisco has weathered the downturn well and now is playing offense as it targets new markets and ramps up acquisitions.
Here are a few key themes to watch in the quarter:
Overall demand: Jefferies analyst William Choi said in a research note that Cisco likely saw demand across its entire product line. Overall, Cisco's Nexus switches are performing well even though there may be supply constraints, said Choi.
Telecom carrier spending ramps. Telecom companies note that their capital spending is increasing. Verizon, AT&T and select European carriers are all spending more. Cisco is likely to benefit. Enterprise spending recovers. Cisco's switches lineup may benefit from better enterprise spending. However, Choi comes back to supply concerns in his research note:
We've heard lead-times on some switches extended to 6-8 weeks and that 10GB component availability is tight across the industry. We believe these shortages likely meant some business shifted into Q3. We believe the shortages were primarily in Dec. month and execution has improved since.
Wedbush Securities analyst Matthew Robison said in a research note:
Adding 3Com together with H-P yields a competitor with about 10% of Cisco market share in switching, so for a combined competitive effort of that magnitude to get a meaningful edge on Cisco they would have to have the ability to respond with a large percentage increase in supply. We view such circumstances to be unlikely. Cisco shortages may have marginal benefit for peers, but we think the more meaningful effect will be pricing power and bookings visibility.
What's the impact of those supply problems? Robison said in a research note:
We believe demand is good and if it were not for continued supply constraints, we would forecast revenue to be at the high end of the range.
The big question is whether Cisco has a fix for these supply chain issues.
Some color on the Unified Computing System. UCS isn't large enough as a business to yield hard data, but analysts are hoping for some indication of how many customers are evaluating Cisco's data center systems.
Stifel Nicolaus analyst Sanjiv Wadhwani noted:
Our recent checks show that Cisco's UCS product is faring quite well with recent wins at HSBC Bank and Mastercard.
The outlook matters. Analysts generally expect, Cisco to project a return to double-digit growth. "As usual, the outlook matters more and we expect a forecast that yields double-digit year-over-year organic growth thanks to a better environment and easier comparisons," said Morgan Keegan analyst Simon Leopold.