NEW YORK (CNN/Money) -
Cisco Systems Inc. is in the position that many ace pitchers find themselves in when their teams go on a big losing streak: their job is to stop the bleeding and notch a much-needed win.
The Nasdaq composite has tumbled about 6.5 percent in the past two weeks due mainly to worries that rising interest rates will put a big dent in tech earnings. And Monday brought no relief, with the index off another 1.5 percent in midday trading, leaving it about 12 percent below its high for the year, reached in late January.
Cisco (CSCO: Research, Estimates), the world's biggest maker of Internet gear, has fared even worse: its stock has fallen 18 percent since the company reported strong fiscal second-quarter results in early February and is trading more than 25 percent below its high for the year.
But Cisco could help ease tech's pain with a strong fiscal third-quarter earnings report.
Since the company generates the overwhelming majority of its revenues from sales of switches and routers to large corporations and telecom service providers, Cisco's results and guidance will be viewed as key barometers for the overall health of technology spending.
Needs to beat, not just meet, estimates
Industry analysts expect the company to report fiscal third-quarter earnings of 18 cents a share and sales of $5.55 billion, increases of 20 percent from a year ago. But Cisco will probably need to do better than that to mollify Wall Street.
The company beat earnings estimates for its second quarter by a penny a share in February but that was not enough to satisfy investors since it only raised its sales guidance slightly.
Cisco chief executive officer John Chambers, whose remarks are closely scrutinized during the company's conference calls, was slightly more bullish than he had been throughout last year. Nonetheless, he issued a relatively guarded outlook for information technology (IT) spending.
But since February, there have been more encouraging macroeconomic signs, most notably, better-than-expected job growth in March and April. That's led the market to expect a cheerier tone from Chambers.
"I think Cisco's body language is going to be positive. In general, IT spending is expected to get better," said Sunil Reddy, manager with Fifth Third Asset Management, which recently added to its Cisco position in the Fifth Third Technology fund. "I like where the economy is headed and that's going to benefit tech companies like Cisco."
To that end, investors would probably be disappointed if Cisco does not raise its sales guidance for its fiscal fourth quarter, which ends in July. Analysts are predicting a 4 percent increase from the prior quarter, to $5.76 billion. That would be a 22 percent jump from the same period last year.
Cisco usually does not give earnings guidance. Analysts are forecasting earnings of 19 cents a share for the fourth quarter, up from 15 cents a year ago.
"We've gotten to the point where Cisco needs to be more optimistic than they have been," said Timm Bechter, an analyst with Legg Mason.
And Bechter thinks that Cisco has reason to be excited. He believes that going forward, increased Internet traffic for things like video conferencing and services and other types of broadband video content will lead to higher demand for Cisco's core switching and routing products.
How strong is the recovery?
Still, mixed results from some of Cisco's smaller rivals have raised doubts about whether the recovery in networking equipment is sustainable.
Juniper Networks (JNPR: Research, Estimates) reported better-than-expected first-quarter results last month but the market shrugged. And another Cisco competitor, Foundry Networks (FDRY: Research, Estimates), posted first-quarter sales and earnings that were lower than consensus forecasts.
But Fifth Third's Reddy said that Foundry's weaker-than-expected results were due in part to pricing pressure from Cisco. And since Cisco's gross margins, a key measure of profitability, were a healthy 68.5 percent in the second quarter, it is in a better position to lower prices.
As for Juniper, Reddy thinks that investors are concerned about how long it will take for the company to integrate NetScreen Technologies, the network security firm that Juniper bought last month. Fifth Third Asset Management also owns shares of Juniper.
Still, William Becklean, an analyst with Oppenheimer, is not convinced that there has been enough evidence of a full-blown recovery just yet. He said that increased telecom spending has helped Juniper and Cisco but that Cisco will need to see increased spending from other large businesses, otherwise known as enterprise customers.
For this reason, Becklean thinks Chambers is unlikely to be overly confident, particularly since excessive optimism in the late 1990s and early 2000 came back to haunt the company once the bubble burst.
"Everyone expects a pickup in enterprise spending in the last half of the year but we're not seeing it yet," said Becklean. "This is still an environment where it is hard to have a high level of confidence forecasting a recovery."
Legg Mason's Bechter owns shares of Cisco and Juniper but his firm has no banking ties to the company. Oppenheimer's Becklean does not own shares of companies mentioned and his firm has no investment banking relationships with them.