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Questions Cloud Cisco Ahead of Q2 Results

Worried about currency effects? Don't. Worry instead about demand.

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Analysts have high expectations for Cisco Systems as the networking equipment giant gets set to report second-quarter earnings on Wednesday after markets in New York close for trading. But after it trimmed its outlook for the current quarter in November, investors will be looking for signs that Cisco is any closer to turning the corner in some of its key markets.

The consensus of analysts surveyed by Thomson Financial calls for Cisco to report earnings per share of 51 cents on revenue of $11.8 billion and to project third quarter earnings of 52 cents a share on $12 billion in sales.

One big question: How badly will Cisco’s results be hurt by the effect of the strong U.S. dollar? Several technology companies that do a lot of business outside the U.S. have been contending with the strength of the dollar relative to other currencies. When they convert those currencies to dollars, their results can suffer.

And while Cisco does a great deal of business outside the U.S., as Amitabh Passi, an analyst with UBS wrote in a note to clients today, the risk for significant currency effects is minor: Roughly 95 percent of sales and 65 percent of Cisco’s operating margins are denominated in U.S. dollars.

The more important question for Cisco, he writes, is one of demand for its products. “While the recent focus amongst investors has been on the translation impact of foreign exchange movements, we remain relatively more preoccupied about the potential risk to demand, or transaction risk, from a stronger U.S. dollar for all IT vendors.” Companies in mining, oil, exploration and some other heavy industries that account for about 30 percent of IT spending overall have recently cut their earnings forecasts, which could foreshadow cuts in their spending on things like new routers, switches and servers that Cisco sells.

Another thing to watch: Signs of growth in Cisco’s software, cloud and services offerings, including Intercloud, which it announced last year. Services bring in recurring subscription revenue which, over time, becomes predictable and less subject than hardware to volatile swings in demand. “Services are expected to grow in importance for Cisco as it expands its offerings,” Passi writes.

Here are a few other key metrics to watch for in the report: Bookings at corporations in the U.S. — Cisco calls them enterprises — declined by 1 percent year on year in the first quarter after eight straight quarters of growth. Also watch bookings in emerging markets like China, India and Russia and from service providers generally. Both have long been strong points for Cisco but have been under a lot of pressure in recent quarters.

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