Cisco results seen solid but bar set high

By Ritsuko Ando

NEW YORK (Reuters) - Cisco Systems Inc's <CSCO.O> quarterly results this week are expected to reflect some recovery in tech spending, but it may be hard to get investors to commit more money to a stock that is already up 40 percent this year.

Analysts will also focus on what's next in the company's aggressive acquisition strategy, and particularly whether it intends to raise its $3 billion bid for Tandberg <TAA.OL> after a group of the videoconferencing company's investors demanded a higher price.

Mergers and acquisitions have played a key part in Cisco's growth, helping it become the top vendor of routers, switches and other network equipment to businesses and phone companies.

Analysts said Wednesday's results are likely to show more customers beginning to invest in their networks after putting off large investment decisions during the recession, but they also said much of that has already been priced into the stock.

Citigroup analyst Richard Gardner expects the results to show improving demand, but added: "That said, given ramping expectations and Cisco's penchant for conservatism...fiscal first quarter results and guidance are unlikely to be a significant near-term catalyst."

Analysts on average expect fiscal first-quarter revenue of $8.74 billion, down 15 percent from a year earlier but up 2 percent from the previous quarter, according to Thomson Reuters I/B/E/S. They see second-quarter revenue at $8.96 billion.

Earnings are expected to be 31 cents a share excluding options expenses. A year ago, Cisco reported earnings excluding items of 42 cents.

While the U.S. economy grew at a faster-than-expected 3.5 percent in the third quarter, other recent economic indicators including housing and unemployment remain weak.

BMO Capital Markets analyst Tim Long was wary of expecting the results to trigger a significant rise in the shares.

"We believe Cisco would need to report revenue upside of about $200 million with at least 1 cent of EPS upside in the fiscal Q1 and Q2 in order not to disappoint investors," he said. Long has a $21 price target and "market perform" rating on the shares.

DEALMAKING NOT OVER

While Cisco's outlook for the current quarter is likely to be the main focus, analysts will also pay attention to any comments on Tandberg.

An acquisition of the Norwegian market leader in videoconferencing would help Cisco accelerate its push into video communications, complementing its high-end TelePresence video meeting service for executives.

"Ultimately, we believe Cisco's down market move in the enterprise video space makes too much sense for it to potentially lose over several hundred million dollars, and we expect Cisco to come to an agreement that is likely to include raising its offer," Long said.

UBS analyst Nikos Theodosopoulos, however, said he does not expect Cisco to offer more. "We doubt Cisco will raise its bid as it would set a bad precedent for the company," he said, adding that Cisco may announce more deals before the year-end.

Chief Executive John Chambers has said Cisco will remain an active buyer as it positions itself for an economic recovery and the next wave of network spending. Two weeks after announcing the Tandberg bid, Cisco unveiled a $2.9 billion deal for wireless equipment maker Starent Networks <STAR.O>.

Analysts say Cisco, which generated $2 billion in cash flow from operations last quarter, can do more deals but may opt for some financial engineering to bolster its war chest.

Methods include issuing debt or reducing its pace of share buybacks. It may also repatriate some of its foreign cash if it wants to buy more U.S. companies, BMO's Long said, although that could have costly tax implications.

Wedbush Morgan Securities, in a research note last week, said there was a wide range of companies that could be Cisco's next acquisition target, including business software makers like VMware Inc <VMW.N> and BMC Software Inc <BMC.O>.

(Reporting by Ritsuko Ando, editing by Tiffany Wu, Dave Zimmerman)

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