PREVIEW-Cisco results seen strong but Europe worries abound

Fri May 7, 2010 11:05am EDT

Related Topics

* Fiscal Q3 results due after market close on May 12

* Wall Street sees revenue up 25 pct to $10.23 bln

* Street sees Q4 revenue $10.62 bln

* Analysts say Europe a concern

By Ritsuko Ando

NEW YORK, May 7 (Reuters) - Cisco Systems Inc (CSCO.O) is expected to report a 25 percent rise in quarterly revenue and give an upbeat outlook next week but worries of troubles in Europe may prevent the shares from rallying much.

The results are likely to show a recovering U.S. economy and increasing Internet traffic encouraging companies to buy more network equipment from Cisco. But analysts said jitters about Europe's economy will weigh on investor sentiment.

"Clearly, April was a good quarter for Cisco. The numbers will be good. But you have to pay attention to what's happening in the global economy," said Broadpoint AmTech analyst Mark McKechnie.

"Europe is 20 percent of Cisco's business, and you have to imagine that the business opportunity there is different from four weeks ago when the Greek troubles started."

The euro this week hit a 14-month low against the dollar on concerns that Greece's debt problems could carry over to other Western European countries like Portugal, Italy and Spain and hurt growth in the overall European region.

The Dow on Thursday suffered its biggest ever intraday drop as a suspected trading glitch and euro debt fears threw the market into chaos. Shares of Cisco, one of the most important barometers for the tech industry, have fallen around 8 percent this week.

Cisco's results for its fiscal third quarter ended May 1 will not have been affected by troubles in Europe. Analysts expect profit excluding items to rise to about 38 cents a share from 30 cents a year earlier, on revenue growth of 25 percent to $10.23 billon, according to Thomson Reuters I/B/E/S.

Wall Street also expects revenue to rise further in the fourth quarter to $10.62 billion. If Cisco's outlook exceeds that, that could help the stock recover from the latest sell-off, although gains may be limited, analysts said.

Shares of other tech bellwethers such as International Business Machines Corp (IBM.N) have suffered despite strong results and solid outlook.

"If you are able to put up a good quarter and give good guidance, I think you can have the stocks react favorably. But right now, the trend is to pick profits on winners," said Jefferies & Co analyst William Choi.

"Clearly people are concerned about the PIGS economies (Portugal, Italy, Greece and Spain) having an impact throughout Europe and who knows where else."

CHEERLEADER CHAMBERS OR CAUTIOUS CHAMBERS?

Analysts will be listening to Cisco Chief Executive John Chamber's comments for any change in his typically optimistic tone.

The charismatic Silicon Valley veteran is often seen as the technology sector's biggest cheerleader due to his upbeat declarations on the economy and potential of the Internet. But he has also, on occasion, alerted investors to troubles ahead.

In 2007, Chambers was one of the first to admit to a dramatic fall in orders from banks, cautioning the market that the financial sector's problems were spreading to the broader economy. Other executives at the time had said the impact was limited.

Investors will also be on the alert for comments about growing competition with Hewlett-Packard Co (HPQ.N) and IBM, in addition to traditional networking rivals like Juniper Networks Inc (JNPR.N).

Cisco, the world's biggest manufacturer of routers and switches, last year expanded into data center servers. The move pits the company against HP and IBM, both its historical resale partners.

HP and Cisco have since become rivals rather than partners, with HP buying 3Com, a smaller network equipment competitor to Cisco.

Analysts say the competition isn't likely to hurt Cisco's results yet, but many plan to keep an eye on how Cisco steps up its game, and whether it will offer aggressive discounts or buy more niche technology companies.

Some have said Cisco could buy a data storage company like NetApp Inc (NTAP.O) to compete against HP, although others say such a move was unlikely given recently higher valuations. NetApp shares have nearly doubled from their year-low in May 2009.

"I don't think they need to. I certainly don't think they'd buy this far into a recovery. My sense is that if they were going to do a big acquisition they would've wanted to do it when the market was depressed," said Broadpoint's McKechnie.

Indeed, Cisco announced a series of acquisitions late last year, including a deal worth over $3 billion for Norwegian videoconferencing company Tandberg.

The move, an extension of the company's efforts to move on from its traditional focus on routers and switches, has made Cisco the world's biggest videoconferencing provider. (Reporting by Ritsuko Ando, editing by Tiffany Wu and Derek Caney)

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