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Updated from Aug. 5

The fourth quarter looked ugly to Wall Street, but


(CSCO) - Get Cisco Systems Inc. Report

insists the rays of a tech-spending recovery are just about to break through the clouds.

The San Jose, Calif., company posted fiscal fourth-quarter profits that were broadly in line with analyst estimates. Those numbers disappointed investors, who prompltly sent the stock plunging 5% in after-hours trading. In early action Wednesday morning, those losses held, as Cisco opened down $1 at $17.86.

But Cisco was far from done on this Tuesday evening. On a conference call with analysts, Cisco executives projected 3% sequential revenue growth for the first quarter. That number was in line with the Street's best guess, and struck some observers as a bullish sign because the first quarter is traditionally Cisco's weakest.

In keeping with that theme, CEO John Chambers emphasized the positive. He told analysts that an economic recovery was "gaining momentum" and said he expects to see a gradual "industry by industry recovery, starting in the U.S."

Cisco watchers, all too attuned to the executive's body language, were cautiously optimistic.

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"This is the first time we've heard Chambers be genuinely positive in a very long time," said JP Morgan Chase analyst Ehud Gelblum, who has a buy on the stock. JP Morgan Chase has no underwriting ties to Cisco.

But the cheery tone didn't turn back a Cisco-led postclose tech selloff Tuesday. Investors were more miffed by Cisco's inability to reach their expectations, and troubled by new concerns that communications gear demand may be getting softer.

Observers were quick to look for clues in the earnings numbers. CIBC World Markets analyst Steve Kamman noted a sharp rise in inventory, to $873 million in the latest quarter from $765 million in the fiscal third quarter. But Cisco blamed the acquisition of Linksys for the increased level of parts in the chanel.

Linksys also got the blame for dragging down gross margins, which slipped slightly to 70% from almost 71%. Cisco executives said that they expect Linksys' lower margin consumer products to subtract a percentage point from gross margins; they projected a 68% target for the current quarter.

For the fourth quarter ended July 27, Cisco reported earnings of $982 million, or 14 cents a share, on revenue of $4.7 billion. A year ago the company earned $772 million, or 10 cents a share, on sales of $4.8 billion. On a pro forma basis, excluding certain costs, latest-quarter earnings were 15 cents a share.

Analysts surveyed by Thomson First Call had forecast fourth-quarter earnings of 15 cents a share on revenue of $4.7 billion. But investors have grown accustomed to Cisco beating its target by a penny, and the company's failure to do so Tuesday sent its stock down $1 in postclose action to $17.86.

The stock has surged in recent weeks to a 52-week high as investors have begun wagering that the company will be among the first to benefit from any growth in the economy. Whether Cisco's rally, and the techwide surge that surrounded it, will be intact when trading resumes Wednesday now appears to be the key question.

One of the bright spots in Cisco's earnings was government contracts. Typically government work accounts for about 5% of Cisco's sales, but thanks to a surge in national defense and federal communications spending, Cisco's government sales were about 7% of total business, says JP Morgan Chase's Gelblum.

"I think they are relying on the U.S. government business to be stronger than normal this quarter," says Gelblum.