Cisco earnings preview: Has its refocusing been sharp enough?

Cisco (Nasdaq: CSCO) reports its first-quarter earnings Wednesday, and, after six months of belt tightening, cost cutting and layoffs, the big question to be answered remains the same as a quarter ago: Has the blood letting worked?

The company in recent weeks has worked hard to refocus on core businesses and to push its products out to a broader (down market) audience, earlier this month announcing a $99 video conferencing service and just last week adding a telepresence and UC component targeting mid-sized enterprise customers. The moves not only help it make inroads to a deep market, but also could help it hold off pressure from companies like Avaya, Polycom (Nasdaq: PLCM) and Vidyo, which increasingly are eroding its share of the video conferencing market.

In August, Cisco's earnings previews weren't too exciting; the stock was trading below $14.50 (from a high of $24.87), and analysts predicted a broad range of EPS, from 31 cents to 42 cents, with a consensus of 38 cents for the quarter on sales of $11 billion; the rub, of course, is that 38 cents is 4 cents off the EPS of a year ago. For the year, analysts see $1.60 EPS.

As Jefferies & Co. analyst George Notter said at the time: "While the stock is cheap, it's very early days in the company's restructuring efforts--the company hasn't yet addressed much of the restructuring that's necessary in our view. We expect that there's significant inertia in the business and believe the outlook for the business can still get worse."

But Cisco beat analyst estimates of its fourth fiscal quarter profits, despite seeing net income plunge, and the combination was enough to send prices up above $16 (it's trading in the vicinity of $18 this morning). Cisco earned 40 cents a share in that quarter, better than the 38 cents analysts had expected. Sales came in at $11.2 billion, beating analyst expectations of $11 billion.

Much was attributed to CEO John Chambers' actions in May, when he vowed to rein in spending by as much as $1 billion, to get the company more in line with expected revenue. The cost cutting was well received by analysts.

"You've got good cost controls on the earnings," said Colin Gillis, an analyst at BGC Partners in New York. "It's a company that's going to be driving earnings twice as fast as revenue."

During last quarter's earnings call, Chambers said he expected this quarter to see revenue growth between one percent and four percent, below last year's first quarter growth of 27 percent. But he still sounded a note of caution:

"We all see the uncertainty in the global markets," he said. "It is too early to determine the effects on capital spending."

UBS analyst Nikos Theodosopoulos told The Wall Street Journal that he didn't think "Cisco will ever be back in the classic sense," but expects good results this week.

Analysts expect this quarter to come in with revenues of $11.01 billion, up 2.75 percent from the $10.75 billion in the first fiscal quarter a year ago, with net income of 34 cents, down from 37 cents, according to Wall Street Cheat Sheet.

Cisco has struggled to transition from a fast-on-its-feet tech startup to a legacy infrastructure provider, and Chambers acknowledged the company took its eye off the core of its business as it looked to expand into new businesses.

It's shown some resilience, though, as it has restructured, scoring a big win this month with AT&T as the telco rolled out pieces of Cisco's Videoscpae initiative for its own play at wireless IPTV across its entire U-verse footprint. Its continued health, though, will require that it fight of its competition in the networking business, where it's continued to struggle. And, combined with a sluggish economy and buyers looking for deals on infrastructure expense, that could make this quarter's results critical for the company. -Jim