Cisco Systems (CSCO Quick QuoteCSCO - Free Report) is set to report second-quarter fiscal 2017 results on Feb 15. Last quarter, the company reported a positive earnings surprise of 1.85%. However, excluding stock-based compensation, earnings decreased 3.3% from the year-ago quarter to 59 cents per share.

Moreover, Cisco’s second-quarter fiscal 2017 guidance was disappointing. Revenues (excluding the SP Video CPE Business) were expected to decline in the range of 2-4% on a year-over-year basis, primarily due to weak order trend from service providers (down 12% in first-quarter). Notably, service providers comprise roughly 25% of the company’s business.

Further, non-GAAP earnings were anticipated to be in the range 55–57 cents per share. The company had reported earnings of 53 cents in the year-ago second quarter.

The disappointing guidance affected Cisco’s stock price. Since the announcement of first-quarter fiscal 2017 results (Nov 16, 2016) the stock has declined 0.1%, while the Zacks Computer Networking industry gained 0.6%. In the last one-year, the stock has increased 25.5% slightly lower than the industry's gain of 26.9%.

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

Factors to Consider

Cisco’s strategy of diversifying business by introducing software-based networking tools and security services, and relying less on specialized routers and switching equipment appears to be yielding results. Moreover, partnerships with the likes of Ericsson are positive for the company's top-line growth.

However, the increasing competition from the likes of Arista Networks (ANET Quick QuoteANET - Free Report) and sluggish growth in the emerging markets will continue to hurt results.

Earnings Whispers

We note that Cisco has beaten the Zacks Consensus Estimate in all of the last four trailing quarters, with an average positive surprise of 6.94%.

However, our proven model does not conclusively show that Cisco will beat earnings this quarter. This 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. As you will see below, that is not the case here.

Zacks ESP: The Earnings ESP which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, currently stands at 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at 50 cents. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Cisco has a Zacks Rank #4 (Sell). Note that we caution against stocks with a Zacks Rank #4 or 5 (Strong Sell) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Stocks to Consider

Here is a stock that you may want to consider, as our model shows that it has the right combination of elements to post an earnings beat this quarter:

Applied Optoelectronics Inc. (AAOI Quick QuoteAAOI - Free Report) with an Earnings ESP of +15.87% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

ARRIS International plc with an Earnings ESP of +1.56% and a Zacks Rank #2.

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