Cisco (NASDAQ:CSCO) is set to report its second quarter earnings of fiscal 2012 on Wednesday. Here we highlight a few key trends to watch for in the upcoming earnings release. Cisco competes with HP (NYSE:HPQ), Juniper Networks (NYSE:JNPR), Alcatel-Lucent (NYSE:ALU) and Huawei-3Com in the network equipment business.
Our Trefis price estimate for Cisco stands at $21, which is about 15% above the market price.
Uncertain Economic Environment to Weigh on Revenue Growth
Cisco’s revenues have increased for the past four quarters. In Q1 2012, Cisco’s revenues grew about 5% in spite of the company’s top line suffering from continued lower government spending in both the U.S. and Europe. However, Cisco pointed out concerns in its last quarter earnings about the uncertainty in the macro environment and mentioned explicitly to keep a check on expectations and ‘model conservatively’.
Cisco’s revenue for the second quarter is expected to increase 7% to 8% on a year-over-year basis.
Margins Improvement is a Must
During Q1 11, Cisco’s gross margins contracted both on a year-over-year and quarter-over-quarter basis as the firm faced intense competition from players like Alcatel-Lucent, Hewlett-Packard, IBM and Juniper Networks as well as Chinese firms like ZTE Corporation and Huawei Technologies Co.
As competition remains intense and the overall market spending takes a hit, Cisco’s margins can be expected to dip by 80 to 100 basis points during the quarter. However, Cisco seems to be focused on improving its margins and will be realizing only $100 million of severance charges in Q2 12 of the total $1 billion projected for fiscal 2012 to keep its operating margin from decline. 
Cisco has so far realized $925 million of the severance charges related to its workforce reduction program announced in July 2011, but it will be good to see if Cisco reports some real numbers for the estimated annual expense reductions of $1 billion it aims to achieve in its Q2 earnings release.Notes: