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Cisco Needs Solid Quarterly Numbers From Software, Services

Stocks in this article: CSCO HPQ

ISI Group Analyst Brian Marshall will also be paying close attention to Cisco's margins. "While CSCO's execution has improved over a prolonged industry downturn (e.g., streamlining costs, divestitures, product refreshes, etc.), the sustainability of gross margins in the low-60% range (e.g., within 61-62% target range) remains uncertain," he wrote, in a note released earlier this week.

Software-Defined Networking (SDN) also poses a threat to Cisco's margin model, according to Marshall, although he feels that the company's efforts in the space will reap dividends.

SDN refers to a set of techniques for managing network traffic flows through software. Cisco is one of a number of companies, including rival HP (HPQ), who are touting SDN technologies.

Cisco's guidance will also prove critical. "We expect roughly in-line results for Apr-13, but wouldn't be surprised to see a more cautious outlook for Jul-13," wrote Marshall, who has a 'cautious' rating on the stock. "While CSCO is trying to create a more stable, software/service-oriented business model, we believe gross margins in its core routing/switching businesses (~50% of revenue) remain under pressure."

Analysts surveyed by Thomson Reuters are looking for fourth-quarter revenue of $12.48 billion and earnings of 51 cents a share.

Cisco shares, which have crept up 1.24% during the last 3 months, dipped 0.09% to $21.25 during Wednesday's trading.

--Written by James Rogers in New York.

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