Cisco earnings: Great expectations

February 3, 2010: 9:00 AM ET

Here's the downside of being a rock star: People expect you to rock. So it is for Cisco (CSCO), the networking powerhouse that managed to cut $1 billion during the steepest part of the downturn and come out swinging.

It looks like the company will outpace analyst expectations for last quarter's revenue and profit when it reports earnings after the bell today. Trouble is, Wall Street already expects Cisco to do well – so to move the needle on its stock, Cisco may have to either deliver a big surprise, give bullish guidance, or both.

Here's where the bar is set: The company guided to sales between $9.2 billion and $9.5 billion, and on average analysts are expecting something closer to $9.5 billion. Cisco has predicted profit margins that should bring between earnings per share between 32 and 35 cents – and again Wall Street wants the 35 cents.

"We believe demand is good," Wedbush analysts wrote in a note this week.

"We expect upside to consensus estimates and above consensus guidance," Citi concurred.

And from Cowen and Company: "We expect Cisco to report F2Q10 (Jan) results at or above our $9.4b/$0.34 estimates."

Sounds like Cisco has to knock the cover off the ball if it wants to get this crowd excited. Can they pull it off?

Fortunately, CEO John Chambers and his deputies have been pretty upbeat lately, and so have some big customers. The telecom carriers who buy routers have continued to do brisk business despite the downturn, which suggests they still have an appetite for Cisco gear – and those folks account for about a third of Cisco's revenue. Enterprise sales in North America have been surprisingly strong, as have government sales.

One thing that could have stifled sales? Parts shortages. A few Cisco suppliers have said that because of unexpectedly high demand, they weren't able to deliver as many goods as they would have liked. If that effect hit Cisco, it probably resulted in sales that were a little lower than they could have been, and profit margins that were a little higher.

There are some other wildcards that could have boosted revenue: collaboration software like WebEx and so-called advanced technologies like IP telephony and video. If those had a big quarter, Chambers & Co. might be able to clear the high bar Wall Street has set after all.

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