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Cisco earnings bellwether for industry

Wall Street is anxiously awaiting next week's earnings announcement from Cisco Systems in hopes for better times for the networking industry.

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Wall Street is anxiously awaiting next week's announcement of third-quarter earnings from Cisco Systems (CSCO) to see if the networking giant's results will herald better times for the industry.

Investors are lowering their expectations for many networking companies these days. The industry is plagued by a widespread fear of diminishing returns, even for normally skyrocketing stocks like Cascade Communications (CSCC) and 3Com (COMS).

In fact, the highest fliers have been hit the hardest because analysts no longer believe these companies can maintain their high rates of growth.

Cisco has been one of a number of networking vendors to capitalize on the need to expand the plumbing for the Internet and the trend of installing enormous single networks for corporations. As one of the industry leaders, Cisco is closely watched to try and predict which way the rest of the market is likely to move.

The company will report earnings at the close of the market Tuesday.

Cisco's is expected to post third-quarter earnings 52 cents per share, according to a consensus of analyst estimates compiled by First Call. A PaineWebber report predicts that the company will report $1.66 billion in sales for the quarter.

If Cisco's numbers diverge greatly in either direction from expectations, the shock waves can be expected to affect the stock of the other big networking companies too.

But some analysts say that their colleagues are being short-sighted. "People are really focused on the numbers this quarter, and frankly, they should be looking at the overall outlook," said Paul Weinstein, a managing director for PaineWebber.

The financial analyst said that Cisco, like many networking firms, faces multiple challenges ahead in a fat-changing competitive landscape.

Cisco's stock has been in a tailspin since mid-January tumbling from a high of $75 per share. The downturn was caused by comments from CEO John Chambers in February that indicated the company's international sales have been slower than expected. In turn, a few financial houses downgraded the company's stock.

The stock is trading in the mid-50s this week, thanks to a slight recovery sparked by news of new products to debut next week. (See related story.)

The company also announced a reorganization last week, targeting three newly focused groups at service providers, enterprise networks, and small and medium-sized businesses.

Still, investors are concerned about increased competition for the networking monolith. New technology called IP switching is being billed as an effective replacement for routers, Cisco's bread-and-butter product line. Strong merger plays by 3Com and U.S. Robotics and Cascade and Ascend Communications will make these companies more directly competitive with Cisco.

Cisco has been responding to the challenges with a string of product announcements, including new additions to its line of switches for enterprise internetworks and departmental workgroups. The switches combine support for most local network topologies with ATM connections. The company is rumored to have a next-generation router up its sleeve as well.

The need for networking equipment is obviously still growing, but investors may still take a couple of quarters to adjust to the end of the heady days of triple-digit, year-over-year growth.

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