Cisco's Sunny Outlook Not Lifting Tech

Networking equipment giant Cisco posted strong fiscal second quarter numbers, but investors want more.
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Updated from 5:35 a.m. EST

SAN JOSE, Calif. (

TheStreet

) -

Cisco

(CSCO) - Get Report

says it's hiring and firing on all cylinders as it saw tech spending improvement across the board.

Confident that the upswing in business is part of a "second phase of the recovery," CEO John Chambers told analysts on an earnings conference call Wednesday that Cisco will add as many as 3,000 new employees over the next several quarters.

Looking ahead, Cisco forecast sales growth of 23% to 26%, on a year-over-year basis, well above the 16% analysts had targeted for the fiscal third quarter ending in April.

But the strong comparison to a very weak year-ago period was a lot less dazzling when viewed from a quarterly perspective. Cisco's guidance translates to a sequential quarterly growth rate of 2% to 3% for a quarter padded by an extra week.

Investors greeted the news with a mix of optimism and skepticism, cheering the good news, but fearing it may be a mirage. Cisco shares were up 2% in premarket trading Thursday.

Analysts gave Cisco high marks for the performance, with some reservation.

"Cisco appears to be capturing the leading edge of recovering tech spend," JPMorgan analyst Steve O'Brien wrote in a report Thursday. But O'Brien also added a note of caution, pointing out that Cisco's hiring aims will cut into profit margins.

With the economy sputtering and jobless rates remaining high, any notion that tech companies have turned a corner has been greeting with suspicion this year.

With the exception of tech shops like

Apple

(AAPL) - Get Report

and

Google

(GOOG) - Get Report

, sustainable sales growth has been a difficult accomplishment.

This has been especially true in

IT, where spending has gone from slim to slippery as CIOs look for ways to keep costs down

while managing expansion plans.

Cisco has responded by turning to financing tricks like offering interest-free loans to customers

to help drum up business and stay competitive.

Business computer networking rival

Hewlett-Packard

(HPQ) - Get Report

fired back this week with its own cheap financing.

Chambers defended the practice of loaning money to finance its sales saying Cisco can help customers in the U.S. and abroad who have trouble accessing capital. Chambers said his team "has done a very good job on this and it continues to be a good business as well as the right thing to do."

Cisco CEO John Chambers

The comments came after the company posted strong earnings and sales numbers as it returned to top-line growth in the most recent quarter.

The networking gearmaker posted adjusted earnings of 40 cents a share, up from the 32 cents pro forma profit in the year-ago quarter, and a nickel better than the analysts' target calling for 35 cents a share.

Sales for Cisco's fiscal second quarter ended last month were $9.8 billion, up from the $9.1 billion level a year ago and far above the $9.4 billion analysts were looking for.

One slight blemish: Cisco's gross margins narrowed to 64.5%. Analysts were looking for margins closer to 65.3%.

Cisco shares were up 41 cents, or 2%, to $23.48 in premarket trading Thursday.

-- Reported by Scott Moritz in New York