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When Bad News is Good; Cisco Prepares to Report

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AP

If Cisco meets analyst expectations for its fiscal fourth quarter, it'll report a nearly 20 percent plunge in sales and a 30 percent decline in profits. And that's the good news.

That's because in this new world order of "meeting is the new beating," the bad news is largely baked into Cisco shares and analysts are merely looking ahead to any guidance this company can offer for the back half of calendar 2009.

The Street is looking for 29 cents a share on $8.5 billion, and with Cisco touching so many key enterprise markets, and increasingly some important consumer ones, the conference call commentary will be absolutely critical in dictating the direction of the markets on Thursday.

It's no secret that IT budgets globally have been scaled back dramatically, and so much market research indicates that spending will still feel the squeeze for the foreseeable future. But there are indications now that the tight squeeze is beginning to loosen, and Cisco might be in prime position to take advantage of it.

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Not to mention what happens to this company as various parts of the stimulus package, particularly for government and education spending, begin to trickle into the economy.

It'll also come down to how colorful CEO John Chambers is in describing current economic conditions.

In conference calls past, Chambers has insisted that the company would look for opportunities to spend its way through the recession, picking up bargains, investing in research in development, and expanding into new markets. Most notably, the company acquired Pure Digital for more than $600 million, the maker of the popular Flip digital video camera, with Cisco trying to stuff as much video onto the network as it can.

The company made headlines recently with news that it was following through on planned cutbacks announced earlier this year, laying off workers, not replacing others, in a move toward cutting the payroll by as many as 2,000 positions on its way to saving $1 billion this year. It was another indication of just how closely Cisco is eyeing spending cuts to bolster margins and the bottom line.

So, with all that as a backdrop, some analysts I'm talking to anticipate a bottom line beat tonight. That'd be good, but for the first time in a long time, analysts might be paying more attention to the top line to see whether business continues to be as bad as everyone thinks, or whether there are signs now that the markets in which Cisco plays are beginning to stabilize.

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Still, Cisco shares, while up 19 percent during the quarter, might still have a lot of room to run. The company's entry into the server market might roil customers like Hewlett-Packard and IBM, but it's a move that could pay significant dividends far sooner than later.

Bottom line, Cisco's report might be important to the company, but it's far more important to the broader markets which have been on a tear lately. Good news from Cisco could shift the rally into an entirely higher gear; bad news though could stall everything.

And for traders looking to buy or sell as these numbers come out right at 4pEDT, keep in mind that the real news comes on the company's conference call at 430pEDT. That'll be an interesting 30 minutes of stock action in Cisco trading.

Questions? Comments? TechCheck@cnbc.com