Cisco Q1 Preview: What We’re Watching Wednesday

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Cisco (NASDAQ:CSCO) is set to report its first quarter earnings of fiscal 2012 on Wednesday. Here we highlight a few key trends to watch for in the upcoming earnings release. Cisco competes with HP (NYSE:HPQ), Juniper Networks (NYSE:JNPR), Alcatel-Lucent (NYSE:ALU) and Huawei-3Com in the network equipment business.

Our Trefis price estimate for Cisco stands at $21, which is about 15% above the market price.

See our full analysis on Cisco

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Impact of Uncertain Economic Environment and Government Spending Cuts on Cisco’s Revenues

Cisco’s revenues have increased for the past four quarters. In Q4 2011, Cisco’s revenues grew about 3% in spite of the company’s top line suffering from continued lower government spending in both the U.S. and Europe. However, Cisco pointed out concerns in its last quarter earnings that the hike in U.S. debt ceiling and the ongoing European debt crisis could weigh on its revenues in Q1 12 and projected a low single digit growth for the quarter.

And while the crisis in Europe sustained throughout the quarter resulting in jitters across global markets, major spending cuts by the U.S. government haven’t really been there. [1] As such, we expect Cisco’s revenues to meet the guidance of $11 billion for the quarter or slightly best it.

Margins Will be Key

During Q4 11, Cisco’s product margins contracted as the firm faced intense competition from players like Alcatel-Lucent, Hewlett-Packard, IBM and Juniper Networks as well as Chinese firms like ZTE Corporation and Huawei Technologies Co. As the competition remains intense and the overall market spending takes a hit, Cisco’s margins can be expected to dip.

Also, approximately $300 million of the severance charges related to Cisco workforce reduction program will be realized in Q1 12. [2] And while these are less than the severance expenses that Cisco recognized in Q4 11 ($ 750 million), it will be good to see whether Cisco realized any of the estimated annual expense reductions of $1 billion in Q1.

Understand How a Company’s Products Impact its Stock Price at Trefis

Notes:
  1. Spending Cuts, And Still an Increase in Federal Spending, ourgeneration.org []
  2. Cisco Will Cut 6,500 Workers, Record $1.3 Billion in Costs, Bloomberg []