Cisco Systems Inc posted stronger-than-expected quarterly results and Chief Executive John Chambers said his customers were seeing more stability, adding to hopes that business conditions would soon recover.

His comments, which came a day after similarly optimistic remarks by U.S. Federal Reserve Board Chairman Ben Bernanke, helped shares of the network equipment maker rise 2.5 percent in after-hours trading on Wednesday as investors looked beyond the double-digit fall in sales in the last quarter.

They are seeing some stabilization, a leveling out, or in other words, they are finally beginning to have something reasonably solid underneath their feet, Chambers said of how Cisco customers are describing their current business.

Cisco, the biggest maker of routers and switches, forecast revenue in the current quarter falling 17 percent to 20 percent from a year earlier. The midpoint of that outlook was slightly better than Wall Street's expectation for a 19 percent decline to $8.36 billion, according to Reuters Estimates.

Revenue and earnings for Cisco's fiscal third quarter ended April 25 were also better than expected. While sales for the quarter fell 17 percent to $8.2 billion, that was higher than Wall Street's average outlook of $8.1 billion.

I think you could make some fairly broadbased conclusion that the environment appears to be stabilizing and doesn't appear to be getting worse, said Morgan, Keegan & Co analyst Simon Leopold, adding that Cisco's report boded well for the overall market.

I don't expect a rapid recovery but this is what we need to see happen before we can even consider a recovery.

Cost cuts, underscored by a 12 percent fall in operating expenses to $3.6 billion, bolstered Cisco's bottom line.

Net profit fell to $1.3 billion, or 23 cents a share, from $1.8 billion, or 29 cents a share, a year ago. Earnings excluding items was 30 cents, above the average analyst forecast of 25 cents, according to Reuters Estimates.

Cisco shares rose about 4 percent after the results, before settling at around $20.10, up from their Nasdaq close on Wednesday at $19.61.

CAUTIOUS

Chambers was particularly upbeat about the company's long-term prospects, reiterating an annual revenue growth target of 12 percent to 17 percent -- one which many analysts say isn't possible for the foreseeable future.

I'm as comfortable or probably more comfortable than ever about that target, he told Reuters in an interview.

Yet, Chambers also warned that investors should not get too far ahead of themselves in building on the positives of this quarter as there was no way of knowing when the turnaround would be.

He also said Cisco would maintain tight financial management, even though he believed large-scale layoffs and salary reductions were avoidable for now.

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

He said a year ago that most customers expect a turnaround by the end of 2008 and that Cisco was setting its budget accordingly, but in February this year, he said it was one of the hardest times in his career to give a revenue forecast.

Analysts said such caution made sense.

We're not out of the woods in terms of the economic environment, Leopold said.

Analysts have said that Cisco's results and outlook could provide global investors with a better idea of the depth of the current downturn and possible timing of a recovery.

They are not immune from the contraction in the enterprise IT arena and the retrenchment of enterprise spending clearly continued through the end of April. But they've managed to maintain a fairly tight operation, said Barry Jaruzelski, vice president at Booz & Co.

Analysts also said they would keep an eye on potential acquisitions as Cisco ended the quarter with $33.6 billion in cash, cash equivalents and investments.

In the third quarter, Cisco announced it would buy Pure Digital Technologies, the creator of the popular Flip Video mini camcorder, as well as management software maker Tidal Software Inc. Chambers said there was more to come.

We have a very large war chest and tend to use it over time, he said.

Since Chambers took the CEO role in January 1995, Cisco has grown from a company with $1.2 billion in annual revenues to nearly $40 billion, as the expansion of the Internet fueled demand for routers and switches that direct Web traffic.

(Reporting by Ritsuko Ando and Sinead Carew; Additional reporting by Chuck Mikolajczak in New York and Clare Baldwin in San Francisco; Editing by Richard Chang and Tiffany Wu)

Ben Bernanke Cisco Systems