Cisco Systems Inc Chief Executive John Chambers said business conditions were improving for the world's largest network equipment manufacturer but it was too soon to call a recovery, dragging its shares down 3 percent.

Cisco's revenue outlook was mostly in line with Wall Street's expectations and profit for the July quarter exceeded forecasts. But the CEO's cautious remarks disappointed those who sought a stronger declaration that global technology spending was on the mend.

Analysts said his comments made sense amid mixed economic data, but likely let down investors who have been betting on a recovery in technology demand.

When he qualified that statement and said we've got to wait and see for several more quarters, I think maybe that was a little more conservative than what the Street wanted to hear, said Ronald Gruia, an analyst with Frost & Sullivan.

Cisco, which makes routers and other network equipment, said it expects fiscal first-quarter revenue to fall by 15 to 17 percent from a year earlier. That was in line with expectations for a drop of about 16 percent, according to Reuters Estimates.

That outlook represented a quarter-on-quarter rise of 1 to 3 percent, a key improvement after a steep quarter-on-quarter decline in sales earlier in the year. But Chambers was still cautious.

If we continue to see these positive trends for the next one to two quarters, we believe there is a good chance we will look back and see that the tipping point occurred in Q4, Chambers said.

While this is a very important trend, I would want to see the sequential trends continue for several more quarters before we'd be comfortable with saying that we are returning to normal business momentum, he told analysts on a call.

GLASS HALF EMPTY

Gruia said Chambers' comments overall were a reflection of the mixed outlook for the economy -- a glass half empty, half full situation.

Many analysts, including RBC Capital Markets analyst Mark Sue, saw the results and Chambers' comments as positive.

The confidence from increased bookings and orders should be welcome news to long-term investors, he said. Things are improving even though I don't think John Chambers wants to wave a green flag just yet.

Avian Securities analyst Catharine Trebnik agreed.

I basically came away from it very positive. Where I feel positive is that he indicated that even though Q1 revenue will be down year over year, we seem to have reached a bottom, Trebnik said.

Cisco is one of the first large-cap technology companies to report results that include sales from most of July, making it an early indicator of trends in technology spending.

It is considered a bellwether for U.S. technology spending. While Cisco was initially seen as relatively safe amid the global downturn as its routers and switches are necessary to support growing Internet traffic, its sales suffered as companies, including phone service providers, cut back on spending.

Tighter credit and a focus on expenses have made it harder for Cisco customers to invest in big-ticket technology equipment. Cisco's high-end router, CRS-1, for example, can cost as much as $1 million each.

For the fiscal fourth quarter ended July 25, Cisco said revenue fell 18 percent to $8.5 billion from $10.4 billion in the year-earlier period, matching Wall Street's average forecast, according to Reuters Estimates.

Its profit was marginally better than expected.

Quarterly net profit fell to $1.1 billion, or 19 cents a share, from $2.0 billion, or 33 cents a share, a year ago. Earnings excluding items were 31 cents, above the average analyst forecast of 29 cents, according to Reuters Estimates.

Chambers was once seen as one of Silicon Valley's most enthusiastic cheerleaders, but his recent comments have been somewhat cautious.

Shares in Cisco initially rose about 3 percent after its quarterly results slightly beat expectations and Chambers said in an earlier statement that he saw positive signs in economic and order trends.

After Chambers' comments on the call, the stock backpedaled to $21.51. Cisco shares had closed at $22.17 on Nasdaq.

Some analysts said the market may have already factored in much of the positive news, including the company's ability to cut costs to secure the bottom line even as sales fall.

Chambers said the company's headcount reduction slightly exceeded its previously announced target of about 1,500 to 2,000 jobs, but that it was done restructuring and would now shift its focus to longer-term growth.

(Reporting by Ritsuko Ando and Sinead Carew; Editing by Edwin Chan, Richard Chang, Gary Hill)

Cisco Systems Down