Cisco is set to report its Q3 earnings on Wednesday. The company hopes to boost its income by a solid 5 to 7 percent in fiscal year 2013, but the soon-to-be-announced results for the quarter ending April 27 will most likely undermine this objective.

Cisco expects earnings to improve between 4 and 6 percent in Q3 for the same reasons that have the rest of the market worried: reduced government spending and ‘softened’ demand in the financial services industry. Matthew Robison at Wunderlich Securities told Bloomberg: “The federal government’s spending cutbacks were an unavoidable factor. Big defense contractors are protected by contracts with punitive terms for termination, meaning that the sequester falls disproportionally on other suppliers, like Cisco.”

Robison believes that the slowdown in the public sector may be offset (at least to some extent) by heightened demand for 4G-compatible routers and networking equipment.
Analysts predict that Cisco will report 51 cents per share on $12.49 billion in revenue for the third quarter after the markets close two days from now. It’s considerably more than the 40 cents per share and $11.6 billion in sales the company reported a year ago, but it doesn’t cut it for the Street.

In an effort to combat weakened demand for networking equipment, Cisco is diversifying its revenue base with higher-margin software and service offerings. Late last month, the vendor announced a whole set of new solutions, including services targeted at enterprises struggling with their SAN deployments. The vendor also introduced two new hardware solutions: the Cisco MDS 9710 Multilayer Director and the Cisco MDS 9250i Multiservice Fabric Switch. The two products marked the company’s entry into the 16-gigabit Fibre Channel market.