Updated from August 10

Cisco

(CSCO) - Get Report

shares slumped early Wednesday, after the company posted a solid fiscal fourth-quarter profit Tuesday, but also returned to a cautious stance about future results.

The company surprised investors by saying it expects fiscal first-quarter sales to be flat to 2% above fourth-quarter numbers. That's toward the low end of Wall Street's expectations. Cisco shares dropped 6% in after-hours trading on the comment.

For the quarter ended July 31, the San Jose, Calif., communications equipment giant earned $1.38 billion, or 20 cents a share. That's up from the year-ago $982 million, or 14 cents a share.

On a pro forma basis, excluding certain costs, latest-quarter earnings were 21 cents a share. Revenue rose to $5.93 billion from the year-earlier $4.7 billion. Analysts surveyed by Thomson First Call had called for earnings of 20 cents a share on sales of $5.9 billion.

In premarket action Wednesday, Cisco fell $1.46, or 7.1%, to $19. As recently as June, shares were worth about $24.

"This was a record-breaking quarter for Cisco on a number of financial and operational levels, including generating the highest GAAP and pro forma net income and earnings per share in the company's history," said CEO John Chambers. "The investments we've made in emerging markets around the world, coupled with continued innovation in our core business and advanced technologies, are generating record results."

The quarter brought mostly good news. In a postclose conference call, Chambers said sales to U.S. big businesses grew about 15% from the previous quarter, showing a steady improvement in an area where customers have been notoriously tight-fisted.

The company said its book-to-bill ratio, which measures the proportion of sales to shipments, was 1 for the quarter, a neutral sign. But Cisco said it is sticking with plans revealed last quarter to hire some 1,000 people over the balance of the year, ending a years-long hiring freeze brought on by the tech spending slowdown.

The improvements were certainly good to Chambers, whose salary has been reinstated at $340,000. The shifts ends a three-year-long salary fast by the Cisco chief, who vowed to forgo bonuses and take a $1 annual salary after the company's business collapsed in May 2001. Chambers has had to make due with

millions of dollars' worth of stock options in the meantime.

Not every number looked good to Cisco investors. The fiscal first quarter is seasonally weak, Chambers said, and seasonal effects are the primary reasons for the cautious guidance.

Asked about the nature of the cautious outlook among business customers, Chambers said it was "purely from what I'm hearing from CEOs," who are seeing momentum for more modest growth.

There were other soft spots as well. The company's cash flow of $2.1 billion barely exceeded its quarterly stock buyback cost of $2 billion. And inventories continued to rise faster than sales.

The company said quarter-end inventory hit $1.21 billion, up $86 million, or 7.7%, from the third quarter. Sales rose around 5% over the same period. Any time inventories rise faster than sales, investors take note because the disconnect could signal that the current rate of sales growth isn't sustainable.

Inventory turns were 6.4 in the latest quarter, compared with year-ago 6.8 and 6.3 in the third quarter. The number signifies the number of times in the quarter Cisco clears its inventory. A larger number is better because it shows the company is using capital efficiently and not keeping huge quantities of goods on hand.

"We would expect to see a gradual increase in inventory turns as Cisco returns to more normalized inventory levels after its sharp build-up last quarter," says CIBC analyst Steve Kamman, who has a buy on the stock and whose firm doesn't do underwriting for Cisco. In the company's fiscal third quarter ended in April, Cisco reported a 20% jump in inventory.

The third quarter's large and puzzling increase didn't jibe with sales results. To pessimists, the stockpiling of parts brought back bad memories of three years ago, when Cisco sat atop a $2.5 billion mountain of surplus inventory after woefully misjudging product demand. But to bulls, higher inventory may simply be a preparation for higher sales volume.

Tuesday's news comes as big phone companies and corporate customers increasingly favor gear made by outfits like Cisco and rival

Juniper

(JNPR) - Get Report

. The two companies make Internet routers that help businesses manage growing network traffic levels.