Full 360-Degree Preview for Cisco Earnings (CSCO, HPQ, ORCL)

The technology stock event of the week is about to happen.  Cisco Systems, Inc. (NASDAQ: CSCO) has earnings today after the close, and every technology investor is going to be paying close attention to John Chambers’ mannerisms and inferences on top of what he says for what should have been a great quarter for Cisco.  The recent debacle of Hewlett-Packard Company (NYSE: HPQ) is likely to represent a chance for Cisco to get a faster jump on its data center initiatives, and investors are likely to treat Oracle Corp. (NASDAQ: ORCL) in the exact same light as Cisco after the report.

For starters, John Chambers is expected to announce earnings of $0.42 EPS and revenues of $10.88 billion per Thomson Reuters consensus estimates.  This will also have marked the fiscal year-end and estimates for the July-2010 year are $1.60 EPS on $40.07 billion in revenues.  The estimates for one quarter out are $0.42 EPS and $10.95 billion in revenue.  Cisco sometimes goes out o a limb for guidance, an the estimates for Fiscal July-2011 are $1.79 EPS on $45.95 billion in revenues.

For whatever it is worth, the few revisions in recent days were actually higher for the quarter and for ahead.  That might not sound like much, but this is at a time that growth is slowing and it is on the heels of recent slowing trends in technology and IT spending.

As far as analyst price targets, Thomson Reuters still has an average price target just north of $30.00.  That implies 27% upside to the $23.60 mid-day price after today’s 2.9% drop in the stock.  The 52-week trading range is $20.68 to $27.74.

Options just became a lot more difficult to use for expected price moves now that there are weekly expiration put and call options.  Cisco is one of the stocks that has the weekly expirations. We continue to only use the monthly August expirations, although that is a habit that is likely to be changed soon.  Based on the $23.60 price, our take is that options traders are braced for a move of up to $0.70 to $0.80 in either direction today.  We’d also note that the larger speculative activity is in the Call options for August: the closest call is the $24.00 Call with over 20,404 contracts traded versus an open interest of 80,606 contracts; the closest Put is the $23.00 Put with 7,035 contracts traded so far versus an open interest of 40,328 contracts.

Cisco’s stock chart is significantly different than it was this last weekend.  Now the chart has significant resistance ate about $24.50 and the 200-day moving average is $24.27 and the more volatile 50-day moving average is down at $23.03 today.  In short, it is wedged in between critical levels on either side.

There are some big questions today.  First, will Cisco FINALLY declare a dividend?  We made this “One of the Top Dividend Stories of 2010” based on the hope of a fixed payout.  The company is still growing, but it is the ONLY DJIA component that pays no dividend.  It is sitting on close to $40 billion in cash and it keeps just buying back stock to support the shares rather than paying out a yield.  Cash and cash equivalents and investments were $39.1 billion at the end of the last quarter.  Cisco also repurchased 87 million shares of common stock at an average price of $25.76 per share for a total of $2.25 billion in the quarter.

We also noted after the last quarter that the analyst bias signaled some changes coming based on limited upside in the stock.

We also like to look at day’s sales outstanding or DSOs and inventory turnover.  Days sales outstanding in accounts receivable last quarter were 39 days.  That was unchanged from the prior sequential quarter but was up versus 27 days in the year earlier same quarter.  Non-GAAP inventory turns were 11.1 last quarter, down from 11.7 the prior sequential quarter but up from 10.7 in the same period a year earlier.

Will Cisco’s margins hold up?  Gross margin as a percentage of total revenue was 63.9% versus 64.0% the prior sequential quarter.

Shares were down by almost 3% and just under 26.00 the morning after its earnings report in May.  That puts shares down about 9% since the reaction after the last earnings report.

Pay special attention to John Chambers today as he describes the international markets.  Has Europe picked back up at all since the May and June slowing?  Are emerging markets still showing incredibly robust demand?  With Cisco being one of the tech giants who reports later in the earnings season cycle, this will be some of the freshest enterprise tech and IT spending data.

JON C. OGG