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Cisco's call gets a good reception

The networking giant says after a year of order cutbacks, big U.S. businesses have started to spend again.

By Scott Moritz, writer
August 6, 2008: 12:51 PM EDT

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The good news for Cisco is that some of its biggest U.S. customers are starting to spend again. The bad news is that telecommunications companies are cutting their equipment budgets.

NEW YORK (Fortune) -- Cisco sees challenges continuing well into next year and lowered its sales target slightly on Tuesday, but tech investors focused on the company's stabilizing domestic corporate business.

Champagne wasn't exactly flowing, but investors cheered the apparent return of a near-dead market for Cisco (CSCO, Fortune 500). Shares of the networking giant surged 4% Wednesday, the day after CEO John Chambers spoke favorably about the re-emergence of the so-called enterprise market.

Equipment sales to big companies in the United States jumped 13% in Cisco's fiscal fourth quarter compared to last year. In the previous quarter, they were up 6% year over year.

"While it is too early to indicate it as a trend, we are seeing progress in the U.S. enterprise market," Chambers said on an earnings conference call with analysts on Tuesday. "Total overall enterprise growth is possibly stabilizing."

If true, that is significant for two reasons: The U.S. is Cisco's largest market, and sales to big businesses represents about 13% of total company revenue. This crucial part of the Cisco revenue machine was also the first engine to start sputtering in January 2007, and it eventually collapsed a year ago.

The customers that led the spending slowdown, Chambers says, may be now leading the recovery.

"The large multinationals and financial institutions, which were the first ones to decline almost a year ago, in terms of their spending with us, now are doing dramatically better," Chambers said on the call.

Analysts were encouraged by the signs of life in financial services spending.

"One of the positive aspects of the conference call was the rejuvenation of Cisco's growth in the troubled U.S. financial" market, Merrill Lynch analyst Tal Liani wrote in a note Wednesday.

The bad news: telcos

But Cisco delivered some unwelcome news, too. Just as a core market appears to be regaining some footing, Cisco's sales to phone companies have tumbled.

Big spending cuts like Sprint's (S, Fortune 500) 57% sequential drop in network equipment purchases, and AT&T's (T, Fortune 500) new tightfistedness, threaten to undercut Cisco's total performance.

Sales to U.S. telcos was flat compared to last year, a big drop from the 13% growth in the prior quarter.

The fear now, however, is that telco spending will repeat the pattern Cisco saw in big business: a slowdown in the U.S. that can last a year or more and spread to other key markets such as Europe.

It's also worth remembering that Cisco's chief can be a bit off on his predictions.

A year ago, on the eve of the enterprise spending collapse, Chambers told analysts on a conference call that he was optimistic.

"From a business spending point of view, relative to Cisco," Chambers said on Aug. 7, 2007, "it feels pretty good."  To top of page