Author | Bill Maurer

Abstract: after Cisco Systems issued weak performance guidelines in May, market expectations were low. The strength of the dollar has brought additional resistance. CSCO's 50-day moving average is the key to the next big move.

Next Wednesday afternoon, we will see the fourth-quarter results of technology giant Cisco Systems Systems (Cisco Systems, NASDAQ: CSCO). In May, the company issued far lower-than-expected guidance and expected revenue to fall from a year earlier, disappointing many investors. Management will have a chance to redeem themselves this time, and investors will see whether this is just a short pause in economic growth or the beginning of another downward cycle.

In the July quarter of 2022, Cisco Systems expects revenue to fall 1 per cent to 5.5 per cent from a year earlier. Analysts hope to grow during this period, with non-GAAP earnings per share guidance of $0.76 to $0.84, well below the consensus forecast of $0.92. At the time, management said demand was not a problem and, more importantly, Cisco Systems's performance was still affected by the Russian / Ukrainian situation and China's COVID blockade. This quarter is only the second decline in revenue in the past five years, although two of them have occurred in the past three fiscal quarters.

As you might expect, analysts have downgraded their expectations since the report was released in May. Wall Street's average expected revenue is now $12.78 billion, down nearly 2.7 per cent from the fourth quarter of last year. Interestingly, the dollar has strengthened a bit since the guidance was given, so other things being equal, you might expect income to be close to the lower end of the guidance range. Finally, non-GAAP earnings per share are expected to be $0.82, down more than 2.2% from a year earlier. Cisco Systems has not lost money on adjusted profits in the past five years, although in 10 of those quarters, it was only 1 cent more per share than the previous year.

As we look forward to the current fiscal first quarter ending in October, analysts expect some month-on-month improvement in revenue. However, industry insiders still expect revenue to fall by about 0.4 per cent to $12.85 billion. Non-GAAP earnings per share are expected to grow by more than 2.3% to $0.84.

Revenue growth is expected to accelerate for the full year, as shown in the chart below, in part because the company faces easier comparisons in the second half of the year. Overall, wall street expects its annual revenue to grow by more than 3.2% to $52.87 billion, and non-GAAP earnings per share to grow 5.5% to $3.54.

Quarterly revenue estimates (seek Alpha)

I will also follow the update of the company's three key indicators-deferred income balance, residual performance obligations and annual recurrent income ("ARR"). As shown in the figure below, Cisco Systems's deferred revenue balance has grown very well in the past two years, so I want to see if it will grow as much as usual in the third to fourth quarters. These are revenues that will be recognized in the future, so this indicator can be used as a measure of future business strength. The increase in your remaining obligations can also be seen as a positive factor, as it indicates that you have booked more future business.

Cisco Systems deferred income (company earnings report)

However, the most important figure for investors is probably the annual recurrent income. Cisco Systems hopes to increase this ratio to make the business more stable and reduce seasonal factors, as ARR currently accounts for less than half of the company's total ARR. It is also part of Cisco Systems's move to shift from focusing on hardware to a more service-based business, although the growth rate of key hardware indicators has been more impressive in recent quarters.

These indicators are critical because investors want to see Cisco Systems achieve some growth in the next few years. Although the stock has a good return on capital plan, including an annual dividend yield of more than 3.3 per cent and a buyback plan, its name is considered an established technology company, just like IBM. To get rid of this argument, we have to start with revenue, and predict that performance will decline year by year, which is difficult for investors to accept. That's why we saw a sharp decline a few months ago, especially as we became increasingly worried about a slowdown in technology spending due to slow global economic growth.

As for Cisco Systems's share price, it closed at just over $46 on Wednesday. Wall Street has a very positive attitude towards Cisco Systems, with the average target price implying a rise of nearly $8 from the current level. In my opinion, this financial report is important because the 50-day moving average (purple line) in the chart below has basically stabilized. Good earnings reports may push this key technology trend line higher, which will support new breakthroughs in the upside. However, if Cisco Systems falls below the 50-day line, a new low will appear during the year, and the line will roll, which may mean resistance in the future.

Cisco Systems Company (Yahoo! Finance)

Investors will be watching Cisco Systems closely next week as the company is the last big technology company to report quarterly results. The hope is that the company is in only one or two quarters of revenue decline, in part because of a stronger dollar, and revenue figures will be much better as 2023 enters. As the stock's 50-day moving average is basically flat, Cisco Systems's performance is likely to be the basis for the trend in the coming months.