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Growth Eluding Cisco

The networking outfit turns in a solid quarter, but Wall Street wants more.

Cisco's (CSCO) - Get Report path is showing glimmers of growth, but Wall Street is still waiting to see the gold.

The San Jose, Calif., networking giant

delivered solid results Tuesday for its fiscal third quarter. On an earnings conference call, executives even outlined surprising strength in a previously disappointing telecom sector.

But skeptics pointed to the company's failure to raise sales guidance, muting the hoped-for Cisco rally. Cisco shares rose 9 cents to $18.30 Wednesday, leaving them mired in a rut that started early this year.

The lack of appreciation isn't uncommon these days for Cisco. The company generated $1.9 billion in cash and continues to post phenomenal profits, even reviving its beat-by-a-penny show this quarter. It also reported that orders exceeded shipments. This positive book-to-bill ratio is usually taken as a sign that the winds are filling the sails.

But for every Cisco strength there seems to be an investor doubt.

For example, after years of acquisitions and talent poaching, Cisco finally seems to have found some success in selling gear to telecommunications companies -- a key growth area outside the stagnant corporate IT market.

Third-quarter service provider sales jumped 20% from the prior period and 25% from a year ago. Much of the strength came from areas like optical transport and the rising demand for new Internet gear from cable companies looking to add capacity.

A huge success story for Cisco last quarter was the CRS-1 mega router, a large Internet traffic-management device designed to outdo a rival box from gear peer

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. The company added three new customers for the big core router, taking the total to 15.

"The CRS-1 is critical to establish Cisco's continued credibility as a technology leader," says Scott Clavenna, analyst with Heavy Reading, a New York research shop. But for now, telcos have very limited applications for the big boxes and need only a few to equip major network hubs.

"So," says Clavenna, "important wins, but a small footprint and revenue."

Stuck
Cisco idles

And now that Cisco finally has an up-and-coming star in its router lineup, some analysts worry it may require huge discounts to get it out the door.

J.P. Morgan Chase analyst Ehud Gelblum says if the CRS-1 was the key to Cisco's telco success, the company may have sacrificed price to achieve it. Gelblum has a neutral rating on the stock.

Price cuts hurt margins, and if there's one glaring weakness with the Cisco machine, it's the ongoing battle against margin erosion.

The CRS-1, like many of Cisco's newer products, command lower margins, say analysts.

"We ultimately believe," writes Gelblum in a research note Wednesday, "that lower gross margins are ahead."