Cisco Systems (CSCO) To Report Q3 Earnings: What Awaits?

Cisco Systems (NASDAQ:CSCO) is set to report third-quarter fiscal 2016 results on May 18. Last quarter, the company posted a 20.45% positive earnings surprise.

Let’s see how things are shaping up for this announcement.

Factors to Consider

Cisco’s fiscal second-quarter earnings of 53 cents beat the Zacks Consensus Estimate by 9 cents.

Revenues decreased 0.1% year over year but came slightly above the Zacks Consensus Estimate of $11.8 billion. Also, margin growth was supported by a favorable product mix.

Improving markets for Cisco’s products in the United States, strong renewals, large multi-year service wins and solid growth prospects in areas like cloud computing, consulting, managed services and security should boost earnings in the fiscal third quarter.

Nevertheless, intensifying competition from several smaller players is likely to be a headwind in the to-be-reported quarter.

For fiscal third quarter, Cisco expects revenues to increase 1% to 4% on a year-over-year basis. The company expects non-GAAP gross margin within the 62.5–63.5% range and a tax rate of 22%, leading to non-GAAP earnings per share of 54 cents to 56 cents.

Earnings Whispers

Our proven model does not conclusively show that Cisco Systems will beat on earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here as you will see below.

Zacks ESP: Both the Most Accurate estimate and the Zacks Consensus Estimate stand at 50 cents. Hence, the difference is 0.00%.

Zacks Rank: Cisco has a Zacks Rank #3, which increases the predictive power of ESP. However, a 0.00% ESP makes surprise prediction difficult.

We caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

You could consider the following stocks with a positive Earnings ESP and a favorable Zacks Rank:

Agilent Technologies (NYSE:A) , with an Earnings ESP of +2.56% and a Zacks Rank #2. The company is slated to report second-quarter fiscal 2016 earnings results on May 16.

Quality Systems Inc. (NASDAQ:QSII) , with an Earnings ESP of +6.25% and a Zacks Rank #2. The company is slated to report fourth-quarter fiscal 2016 earnings results on May 19.

TiVo Inc. (NASDAQ:TIVO) , with an Earnings ESP of +25.00% and a Zacks Rank #1. The company is slated to report first-quarter 2016 earnings results on May 24.