NEW YORK (CNN/Money) - Cisco Systems, the leading manufacturer of computer networking gear, reported an earnings increase of 35 percent for its fiscal third quarter despite a 4 percent decline in sales. But the company issued uninspiring sales guidance for the fiscal fourth quarter.

The company reported net income of $987 million, or 14 cents a share, according to generally accepted accounting principles, compared with earnings of $729 million a year ago.

On a pro forma basis, which excludes stock-based compensation expenses and amortization of assets due to acquisitions, the company posted earnings of 15 cents a share, a penny ahead of analysts' expectations of 14 cents, according to earnings tracking firm First Call. Cisco reported pro forma earnings of 11 cents a share in last year's third quarter.

Sales came in at $4.6 billion for the quarter ended last month, in line with expectations but down from revenue of $4.8 billion a year ago. During a conference call Tuesday afternoon, Cisco CEO John Chambers said that sales for the fourth quarter would be sequentially flat, lower than analysts' expectations of a slight increase to $4.7 billion as well as the revenues of $4.8 billion in last year's fourth quarter.

Shares of Cisco (CSCO: Research, Estimates) have rallied sharply on hopes for a recovery in technology spending during the second half of the year. The stock is up more than 20 percent this year and gained 59 cents, or 3.3 percent, to $15.90 in regular-session trading Tuesday. But shares slipped nearly 2 percent in after-hours trading, according to Island ECN, following the announcement of the fourth-quarter sales guidance.

Cisco is still facing a tough time in its core business -- selling switches and routers -- as corporations continue to hold back on technology spending. These two product lines accounted for 68 percent of Cisco's total sales in the quarter.

During the call, Chambers conceded that the company was performing extremely well, "with the obvious exception of revenue growth." He added that there were signs of improvement in order bookings in April as fears about a protracted war in Iraq ebbed. But Chambers was quick to point out that it was far too early to say whether or not such improvement is part of a sustainable trend.

And that's what Wall Street is waiting to see -- signs of renewed demand for Cisco's bread and butter products. "Cisco needs to show growth in its core markets of routing and switching. It's almost the whole story," said Timm Bechter, an analyst with Legg Mason. He does own shares of Cisco but his firm has no investment banking relationship with the company.

But when push comes to shove, Cisco's continued cautious outlook was not a huge surprise. In fact, Drake Johnstone, an analyst with Davenport & Co., said that given the state of the economy, investors shouldn't expect meaningful year-over-year revenue growth for at least another two or three quarters. Johnstone doesn't own the stock and Davenport does not do investment banking for Cisco.

There was encouraging news about Cisco's gross margins however, a measure of how profitable the company is after accounting for cost of sales. Gross margins came in above 70 percent for the second consecutive quarter, at 70.8 percent.

But some are concerned about Cisco's ability to sustain such high margins going forward, as the company expands into businesses that are less profitable, such as home networking.

"It's hard to see a catalyst for top-line growth, and the company is at peak margins," said John Wilson, an analyst with RBC Capital Markets. Wilson does not own the stock and his firm does not have an investment banking relationship with the company.

During the conference call, Cisco CFO Larry Carter, who is retiring this month, said that he expected gross margins to come in between 68 percent and 70 percent in the fourth quarter. In addition, he said that pro forma earnings for the quarter should be 15 cents per share.

Cisco's cash position declined slightly from the fiscal second quarter. But the company still finished April with $20.3 billion in cash and investments, down from $21.2 billion as of the end of January. Cisco used some of this cash to buy back its own stock; the company said it purchased $2 billion worth of its shares in the quarter.