Low expectations were richly rewarded Friday as networking gearmakers Ericsson( ERICY) and Extreme (EXTR) - Get Report pointed to modestly better times ahead.

Wireless-networking giant Ericsson struck the more positive note with an update on its turnaround progress. The company said it would stick to its promise to deliver profits sometime this year, though it offered no specific dates.

Vague though it was, the cheery talk was warmly welcomed on Wall Street just a day after Scandinavian rival


TST Recommends

(NOK) - Get Report

riled tech investors with a

weak sales projection and a

threat to fire the first shot in a handset price war. Ericsson pulled off nearly the reverse: The Swedish equipment maker said third-quarter sales would not be as bad as analysts had expected and that cost cuts led to an improved outlook for gross margins.

Investors cheered the news, sending Ericsson up 15% in hefty midday trading. Extreme added 21% following solid guidance of its own.


During the past few years, Ericsson had geared up for a booming network upgrade cycle as wireless carriers around the world looked to expand their data traffic capabilities. But as telcos saw their own sales flag, they killed or shelved many of their network improvement plans. Ericsson has slashed its workforce by nearly half in recent years amid efforts to adjust to the steep decline in equipment orders.

Ericsson says the pace of that decline may be slowing as the rate of orders coming in outpaces the rate of shipments going out. Executives on a conference call with analysts Friday said third-quarter sales would be, at worst, slightly down.

"Their outlook wasn't bad," says Deutsche Bank analyst Brian Modoff, who has a sell rating on the stock. Deutsche Bank has done banking business with Ericsson. "Flat to slightly down sales in a seasonally weak third quarter is not bad."

As a recovery project, investors tend to look closely at Ericsson's margins to determine if the company has gotten its cost structure under control. If margins improve, even with weakening sales trends, Wall Street is inclined to put more faith in the turnaround.

The company got a decent grade on that test. Ericsson said it expects to have a gross margin of 35.5% for the year, slightly better than the 34% some were looking for.

Comfort Food

And speaking of things not getting worse, Extreme uttered some

comforting, if not optimistic, words about its prospects on its earnings call Friday.

The Internet switch maker's financial performance had been in doubt in the wake of a surprise departure announcement by its CFO earlier this month. Extreme's shares dropped some 19% on July 8, when finance chief Harold Covert decided he needed to spend more time with his family.

But the nearly in-line fourth-quarter results and raised guidance calmed the jitters Friday.

On an earnings call Friday, Extreme said sales will grow 10% to $400 million in fiscal 2004, adding that it could swing to a profit as early as this quarter. Investors liked the sound of that and poured into the stock, sending the shares up a buck, or 21%, to $5.67 at midday.

But some observers were willing to ignore the promise while they wait for the progress.

C.E. Unterberg Towbin analyst Mark Sue maintained his neutral rating on the stock, unconvinced that the company has its house in order. "Although EXTR may have some large deals in the pipeline and new products are ramping well, we remain on the sidelines as we look for solidification of a new CFO and improving financial metrics," Sue wrote in a research note Friday.

Keeping expectations low seems to be a winning strategy in techland so far.