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Updated from May 11



(CSCO) - Get Cisco Systems, Inc. Report

roller coaster is ready to ride again.

Wall Street's favorite communications-equipment company posted strong third-quarter earnings after the market close Tuesday and guided toward the high end of its revenue-growth target.

The company also said it started hiring in the latest period for the first time since 2002, and noted that orders are running in line with shipments.

Even so, investors failed to rush aboard the stalled Cisco express. The stock slipped 4% Wednesday as the big router-maker revealed that it spent $3 billion on stock buybacks in an effort to support its flagging shares. The reaction marked the third-straight quarter in which Cisco beat estimates and maintained guidance without seeing a significant jump in its shares.

Cisco's stock, which has lost a quarter of its value over three months, dropped 92 cents to $21.33 Wednesday.

Strong Numbers

For its fiscal third quarter ended May 1, the San Jose, Calif., networking giant posted pro forma earnings of $1.4 billion, or 19 cents a share. That's up from the year-ago $1.1 billion, or 15 cents a share. Sales rose 22% from a year ago to $5.6 billion in the latest quarter.

Analysts surveyed by Thomson First Call had expected earnings of 18 cents on revenue of $5.55 billion.

Based on generally accepted accounting principles, latest-quarter earnings rose to $1.2 billion, or 17 cents a share, from $987 million, or 14 cents a share, a year earlier.

The company said gross margins rose 30 basis points in the latest period, to 68.8%. CEO John Chambers said the company would be aggressive on prices, but he added that the latest quarter's gross margins reflect Cisco's ability to reduce prices without sacrificing profits.

Also, in what may be taken as a sign of a pickup in demand, Chambers said the company brought aboard 200 employees in the latest quarter -- its first hiring in two years. He said about 1,000 more employees will be added, largely in engineering and sales, by year-end.

Chambers said his outlook has improved, though he said he remains cautiously optimistic. He said he expects fourth-quarter sales to grow sequentially between 3% and 5%. Analysts had expected an average top-line improvement of 3.6% for the fourth quarter.

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"As our customers' business improves, so will ours," Chambers said on the conference call.

April Showers

Earlier, talk on the call centered on the calendar. As has been widely noted in the financial media, the third quarter included 14 weeks rather than the typical 13, a fact that gained much notoriety in February when the stock got hammered on tepid growth projections.

On Tuesday, Chambers said it was difficult to estimate the benefit of having an extra week in the quarter, but he estimated it added 3% to 5% to order bookings.

Those orders kept pace with deliveries. Cisco CFO Dennis Powell told analysts on a conference call that the so-called book-to-bill was roughly 1, meaning the rate of orders equaled the rate of shipments.

The company's use of its cash pile to support the stock price won favor from some observers. "The good news is those buybacks increase shareholder value," says CIBC analyst Steve Kamman. "That's the right thing to do with the cash, vs. wasteful spending."

Even so, the stock buyback plan doesn't come without its own debate among Cisco watchers. Some skeptics have criticized the company for using cash generated from operations to fund repurchases that they charge

benefit top execs and other insiders at the expense of public shareholders.

Cisco's comments grab Wall Street's attention for a number of reasons. The company is the leading maker of gear for companies' internal communications networks. As such, Cisco's quarterly reports offer a regular update on the state of the broader information technology business. Investors have been waiting for an upturn in that business, but thus far they have been repeatedly disappointed.

The report comes as tech stocks try to mount a comeback from their recent selloff. Shares throughout tech surged in January on hopes that the economic recovery would feed the IT recovery. But the sector has since sagged as valuations started to get out of hand and evidence of the IT rebound remained scarce.

One Step Back

For its part, Cisco has seen its stock lose a quarter of its value over the last three months. The decline came in spite of the company's buyback efforts. Cisco's period-end cash pile fell to $18.9 billion from $19.8 billion as the company repurchased $3 billion worth of stock.

Cisco's recent decline started with its fiscal second-quarter earnings report, posted in early February. Back then the company was riding high on the market's early-year telecom mania, a furor that pushed Cisco's shares near $30 for the first time since January of 2001.

The company's second-quarter report beat estimates easily, and Cisco called for modest growth for the third quarter. But the

shares sold off sharply as Chambers' tepid remarks about capital spending clouded the Street's sunny view.

Similarly, the company's first-quarter numbers,

released in November, highlighted Cisco's experience in managing expectations. The company posted stronger-than-expected results but then confounded its fans by failing to increase guidance.

For the fourth quarter ending in July, Wall Street expects the company to earn 19 cents a share on revenue of $5.76 billion.