Updated with additional information.
With a mixed outlook for IT spending, investors will look for proof that Cisco (CSCO - Get Report) is making progress in its transition to software and recurring revenue models during the company's fiscal fourth-quarter earnings call after the market close on Wednesday.
TheStreet will be hosting a live blog breaking down Cisco's fiscal fourth-quarter earnings starting at 4 p.m ET on Wednesday. Please check our home page then for details.
On Tuesday evening, a report from technology news site CRN said that the IT giant would be laying off 14,000 employees, or almost 20% of its global workforce, as it struggles to change its business. Shares of Cisco were trading down about 2.2% to $30.44 on Wednesday morning.
For the fourth quarter, Wall Street forecasts earnings of 60 cents per share for Cisco on sales of $1.257 billion, according to FactSet.
CEO Chuck Robbins has used acquisitions to speed the transition to new lines of business, agreeing to buy security outfit CloudLock for $293 million in June and closing the $1.4 billion purchase of "Internet of Things" platform Jasper Technologies in March.
"Growth in software business is leading Cisco toward a steadier, recurring revenue model," Nomura analyst Jeffrey Kvaal wrote in a recent report. "However, Cisco is so early into this lengthy transition that it is likely the dividend increase, not improving fundamentals, which have lifted the shares" this year.
Alongside the shift to software, Cisco boosted its dividend 24% to 26 cents per share per quarter in February. The stock is up about 12% year to date.
"Cisco does not have a software-like Ebitda margin profile, or play a role as a primary cloud provider as Microsoft does," Moskowitz wrote.
Microsoft's price to earnings ratio has increased by three to five times, Moskowitz wrote, but Cisco would likely only jump one to two times. The company won't catch Microsoft right now, but should separate from IBM (IBM - Get Report) and its "greater cloud and growth risks," he added.
Kulbinder Garcha of Credit Suisse recommends "caution" with Cisco this quarter, citing a mixed outlook for the sector. Results from IBM and EMC (EMC) suggest that IT spending is soft, he wrote, while Juniper (JNPR - Get Report) and F5 Networks (FFIV - Get Report) were getting better results from telecoms.
Concerns about Europe remain. Juniper and Infinera (INFN - Get Report) had pricing issues with European telecoms, UBS analyst Steven Milunovich noted. However, service providers in Europe, the Middle East and Africa account for less than 10% of Cisco's sales. A UBS survey of Cisco resellers suggested that the company could top sales forecasts.
"To be successful, Cisco must stabilize the switching and routing core while developing new offerings with more of a software bent," Milunovich wrote. Cisco's longstanding ties to legacy customers should help the transition to revenues from data center and security products.
Investors can look for progress in Cisco's shift to software on Wednesday's call. Remodeling a $49 billion top line will be a subject for many more earnings calls.