Last Updated: May 6, 2008: 7:05 PM EDT
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Cisco beats but gives lukewarm sales outlook

The tech bellwether's sales and earnings were slightly ahead of the Street's expectations. But CEO John Chambers again issued conservative sales guidance.

By Yi-Wyn Yen

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Cisco CEO John Chambers described the emerging markets sector as "very lumpy."

NEW YORK (Fortune) -- Cisco Systems, the largest maker of networking equipment, reported third-quarter sales and profits that edged past Wall Street's targets.

However, a conservative outlook for revenue growth in the fourth quarter disappointed investors who had been hoping for signs that tech spending would dramatically improve by this summer.

Cisco CEO John Chambers said U.S. businesses continue to tighten their budgets. "When I talk to my customers, they're modeling for the rest of the calendar year, and it's a little tougher," Chambers said during a conference call with analysts. "It shouldn't surprise us that [U.S. spending] for the next quarter or two will be challenging."

Shares of Cisco (CSCO, Fortune 500) initially rose about 2% in after-hours trading following the news but gave up most of their gains after the company issued its sales forecast. The stock rose 5 cents to $26.33 a share in regular trading on the Nasdaq Tuesday.

Sales for the third quarter, which ended April 26, came in at $9.8 billion, up 10.4% from a year ago and slightly ahead of analysts' estimates of $9.75 billion, according to Thomson First Call.

Cisco posted a quarterly profit of $1.8 billion, or 29 cents a share, down 5.4% from $1.9 billion, or 30 cents a share, in the year-earlier period. Profits slipped due to a $248 million acquisition charge of Nuova Systems, which develops products for data centers.

Adjusted earnings, which exclude certain gains and charges, came in at 38 cents a share, which surpassed analysts' projections of 36 cents a share.

Chambers said he anticipates sales to grow 9% to 10% for the current quarter, which ends in July. His cautious guidance met analysts' expectations for 9% growth.

Due to a slowdown in orders from large North American and European corporate customers, Chambers has given tepid revenue guidance the last two times Cisco reported results. "This is a relatively short-term challenge going forward," he said.

A pull back in tech spending meant fewer orders for Cisco. High-tech equipment orders from service providers slowed, down 3% for the quarter from the same period a year ago. "I was pretty surprised by that since that segment of the market has been performing pretty well," said Erik Suppiger, a senior research analyst with Signal Hill. "It's tough to envision Cisco really seeing a significant recovery until the U.S. economy comes back."

Cisco also saw its growth rate for emerging markets drop drastically to 10% for the quarter ended in April from 24% in the second quarter. Chambers did not specify why the company has seen a decline in that sector, other than it was "very lumpy," a phrase he often uses to describe disparate financials.

Analysts say healthy demand for Cisco's Internet equipment among telecom providers AT&T (T, Fortune 500) and Verizon (VZ, Fortune 500), which are looking to expand their video services, should help the company's long-term growth. But as Cisco struggles to improve orders for service providers and emerging markets, its long-term plans to increase sales by 12%-17% could get a little lumpy.  To top of page

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