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Cisco Systems, Inc. (CSCO - Analyst Report) is scheduled to announce its first quarter fiscal 2013 results after the closing bell on November 13, 2012, and we notice a few downward movements in analyst estimates so far.

Fourth Quarter Overview

Cisco’s fourth quarter 2012 earnings (excluding one-time items and including stock-based compensation) beat the Zacks Consensus Estimate by 3 cents or 7.8%.

Revenue saw 4.4% year-over-year growth, driven by increases in both product and service revenues. Orders saw a 2% year-over-year increase compared with a 4% increase in the third quarter, similar to the trend in the last quarter and indicating slower end markets.

Margins decreased sequentially as well as from the year-ago quarter due to unfavorable mix and weak pricing. Also higher warranty expense pushed up the total manufacturing cost, negatively impacting margins.

First Quarter Guidance

For the first quarter, Cisco expects revenue to be flat to down 1.8% on a sequential basis and increase 2–4% on a year-over-year basis. Non-GAAP operating margin is expected to be 26.5–27.5% of revenue and non-GAAP EPS is expected to be 45 to 47 cents.

(Detailed earnings results can be viewed in the blog titled: Cisco Orders Driving Shares)

Agreement of Analysts

Out of the 13 and 14 analysts providing estimates for the first quarter and fiscal 2013, 2 analysts made downward revisions in the last 30 days.

The majority of analysts expect the company to report its first quarter revenue below the consensus estimate of $11.8 billion. Given the continuing problems in southern Europe and the uncertainty in Cisco’s switching and routing divisions over the last few years, the analysts do not expect an outperformance. They expect limited near-term spending and continued weakness in the public sector.

However, they expect earnings to come in line with the consensus estimate of $0.46 per share, owing to modest gross margin upside from favorable mix, cost cut initiatives, and the recent NDS acquisition. They expect the company to announce more restructuring activities, further asset sales and new products, which should all be accretive to its profits.

The majority of the analysts expect Cisco to issue a conservative second quarter guidance due to continued signs of a slow global capex environment.

Magnitude of Estimate Revisions

In the past 30 days, the Zacks Consensus Estimate remained unchanged for the first quarter as well as for fiscal 2013 at 41 cents and $1.72 per share, respectively.

Over the 90-day period, the Zacks Consensus Estimate was up by a penny for the first quarter and by 3 cents per share for fiscal 2013.

Recommendation

We believe that macro headwinds, a tight spending environment and strong competition could limit first quarter revenue growth.

We believe a conservative guidance by Cisco’s peers including Juniper Networks, Inc. (JNPR - Analyst Report), and F5 Networks, Inc. (FFIV - Snapshot Report), also reinforce the view that the macro environment will continue to be challenging in the near term.

However, the company’s restructuring activities, focus on new products, and pursuance of growth opportunities in international markets could be potential catalysts going forward.

We think the real challenge facing Cisco right now is the possibility of material share losses, as public sector spending shrinks or shifts away from its technology. Hence, the company’s ability to gain share with new products in growth areas will be the ultimate determinant of its success, in our view.

Cisco is no doubt the networking giant. But competitors such as Alcatel-Lucent (ALU - Analyst Report), Juniper, Hewlett Packard Company (HPQ - Analyst Report) through its 3Com acquisition and F5 Networks are slowly picking up market share.

Currently, Cisco has a Zacks #4 Rank, implying a short-term Sell rating.

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