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Investors cheer Cisco's glimmer of hope

The tech titan beat profit estimates and lowers its growth forecast, but investors welcome signs of stability in its core business.

By Scott Moritz, writer
Last Updated: August 6, 2008: 10:43 AM EDT

Cisco CEO John Chambers said growth for the next two quarters will be slower than expected.

(Fortune) -- Cisco shares jumped nearly 5% Wednesday after the tech bellwether reported solid profits and reported signs of stability amid a broader economic slowdown.

The networking gearmaker's latest round of quarterly earnings beat the Wall Street analyst consensus by a penny after the market close Tuesday. The company also said that sales growth in its next two quarters will be lower than previously expected, but investors brushed aside the darker outlook after executives reported a surprising surge in orders in its core networking equipment business.

CEO John Chambers on Tuesday lowered the company's sales-growth target to about $10.3 billion, or 8%, which is below the $10.4 billion, 9%, analysts expected for the the fiscal first quarter ending in October. For the fiscal second quarter Chambers said he expects a year-over-year increase of 8.5%.

Though Chambers said he saw mixed signals as he tried to read the company's prospects and the macro economy, he said his "confidence in our 12% to 17% long-term growth remains very strong." The company did not provide full-year guidance.

Chambers said he saw telecommunications companies at various stages of development and in some cases reluctant to spend until there are top line improvements. But in U.S. business spending, an area of prolonged weakness for the networking giant, Cisco (CSCO, Fortune 500) saw a 13% year-over-year improvement in IT sales. That compares with 6% enterprise spending growth in the prior quarter.

The slight rebound in one of Cisco largest markets, drove shares up nearly 5% cents, to $23.72, in mid-morning trading Wednesday.

The San Jose, Calif., maker of computer networking gear posted a fiscal fourth-quarter profit of $2 billion, or 33 cents a share. That's up from the year-ago $1.9 billion, or 31 cents a share. Excluding certain costs, earnings rose to 40 cents a share from 36 cents a year earlier. Sales rose to $10.4 billion from $9.4 billion a year ago.

Analysts surveyed by Thomson Financial were looking for a 39-cent per share profit on sales of $10.31 billion.

Mired in a widening tech spending slump, Cisco recast its full-year growth outlook in April. For the near-term, the company's growth targets were lowered to a range of between 10% and 15%, while the long-range target remains at 12% to 17%.

With the economic slowdown spreading beyond the United States to Europe, there is growing concern among tech investors generally that demand in developing countries won't be sufficient to offset any revenue shortfall. Cisco, however, is expected to report a healthy revenue boost from emerging markets.

A rival surprises

Last month, Chambers helped send Cisco shares to a one-year low just below $21, after eliminating any hope of a tech spending recovery this year. "I think most of us realize that it's probably going to be a little bit longer than the one to two quarters that some people had hoped for," Chambers said at the time.

That prediction followed a report earlier this year that Cisco was bracing for a slowdown and looking to trim its own costs by curtailing travel and urging managers to use up vacation time.

More recently, Credit Suisse analyst Paul Silverstein downgraded Cisco to neutral on concerns that big phone companies like AT&T (T, Fortune 500) were cutting spending plans for the remainder of 2008.

But amid the gloom, Internet gear rival Juniper (JNPR) reported solid numbers two weeks ago. And to some surprise, the company gave an optimistic forecast for the remainder of the year, an important sign of health in Cisco's core market.

Analysts say the long-range outlook for the company may be more positive than some fear.

Bernstein analyst Jeff Evenson predicts that "Cisco will see earnings growth via revenue growth, operating leverage, and potentially share buy-backs, creating an attractive opportunity." To top of page