Wall Street Strains to Hear Cisco's Cheer

Eager investors will peer into the tech sector's haze again this afternoon with Cisco ( CSCO).

With a two-month-long tech rally on the line, Wall Street is primed for the company's latest profit statement and explanation of sales trends. Given Cisco's recent record of hitting estimates and providing predictable -- if lukewarm -- guidance, it seems unlikely that the San Jose communications-equipment giant will say anything to undercut the market's uptrend.

Still, there is real suspense attached to Tuesday's commentary from Cisco's sprightly CEO, John Chambers. Should he focus on customers' nagging uncertainty and scrimp-and-pinch leanings, then take off the rally cap. On the other hand, with the war and a traditionally weak third quarter behind, even some diehard pessimists are willing to believe that the fourth quarter can only be better.

According to a Multex analyst tally, Cisco is expected to post third-quarter earnings of 14 cents per share on sales of $4.6 billion after the market's close today. The same poll also has analysts projecting a slight improvement in revenue for the fourth quarter, to $4.7 billion. On Monday, Cisco rose 12 cents to $15.39.

Spring Is Here

Analysts figure that one key to any sustainable rally in tech is a return to sales growth at onetime highfliers such as Cisco. There has been precious little top-line expansion at the company since the tech boom peaked some three years ago, and the current year looks like more of the same: After a weak February and a soft March as war loomed, Cisco had its many followers prepared to hear a grim third-quarter report.

Keeping Pace
Nasdaq, Cisco on the rise

But with April came a bounceback, and now investors and analysts expect Cisco to make good on its flattish predictions. Considering the hopeful signs this spring and the past three quarters' sales declines, it wouldn't be a big stretch if Chambers & Co. projected flat to slightly improved sales sequentially.

Going into the last quarter, Cisco was shipping goods faster than orders were coming in. This metric, known as the book-to-bill ratio, tends to offer a view into the sales pipeline. Investors will be hoping to hear that the pace of orders has picked up.

Another big number for Wall Street will be gross margins, the sum of sales minus the cost of selling. Last time around, Cisco astonished observers by widening its margins to 70% from 69%. Some investors think another improvement on margins may be in the cards. But if so, it will likely mark the end of that trend.

Depending on when the pending Linksys purchase closes, analysts expect the thinner-margin contribution from the consumer-market indoor-wireless gearmaker to narrow overall margins on a continuing basis.

Flagging

Cisco will also give investors an update on its promising efforts in data storage and network-security products. With sales flagging in its core business of Internet hardware, some expect to hear the company expound on the virtues of these new growth markets.

And don't be surprised to hear a progress report on the company's share buyback program. In March, the company said it was going on a buyback spree, increasing its stock repurchase budget by $5 billion, for a total of $8.6 billion, to buy its own shares.

With a $20 billion pile of cash and $1 billion in new cash generated each quarter, investors and analysts support the effort, which rewards shareholders and offsets the new grants of executive and employee stock options.

But Cisco investors aren't looking for tidbits. After sending the stock up about 14% in the past month, Wall Street may have set its expectations for something more -- namely a return to sustainable sales growth.

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