5/13/2004 -- It looks as if the tentative economic recovery may have legs after all. Cisco this week posted strong third quarter revenues that improved by double-digits on its performance in the year-ago quarter. Whats more, President and CEO John Chambers announced plans to increase Ciscos employee headcount for the first time in three years with most of these new jobs slated for the U.S., to boot.

According to Cisco, net sales for Q4 2004 were $5.6 billion up 21.7 percent from the $4.6 billion in revenue that Cisco posted in Q3 2003. Whats more, Cisco officials say, Cisco grew its third-quarter revenues by 5.4 percent over Q2 2004 in a quarter that is traditionally seasonally weak, to boot.

[Q]uarter over quarter growth was up in the mid-teens in what is traditionally a seasonally weak quarter, this is the first major growth adjusted for normal seasonality weve seen in the U.S. enterprise and commercial markets weve seen in a very long time, Chambers said during a conference call with analysts.

Net income for Q3 was $1.2 billion, or $0.17 per share up almost 18 percent (or $0.14 per share) from the year-ago quarter, and up sharply (by almost 30 percent) from Q2 2004. Cisco realized pro forma net income of $1.4 billion in Q3 2004 up about 21 percent from Q3 2003.

Elsewhere, cash flows from operations were $2.4 billion for the quarter just passed a record, noted Ciscos Chambers, and up dramatically (45 percent) from the $1.3 billion that Cisco realized in Q3 2003. Ciscos third quarter 2004 cash flow from operations were also up sharply by 29 percent from its performance in Q2 2004. For the quarter, said Chambers, Ciscos GAAP net income and earnings per share were the best in company history.

We were very pleased with almost all of our operational measurements, Chambers confirmed.

Cisco closed the quarter with cash, cash equivalents and total investments of $18.9 billion down from the $20.7 billion it had on hand at the end of Q4 2003, and almost $1 billion less than the $19.8 billion with which it closed Q2 2004. During the same period, however, Cisco repurchased 131 million shares of common stock, for a total outlay of $3.0 billion.

During Q3 2004, Ciscos Catalyst Series switches once again generated the lions share of its revenues 41 percent, up 1 percent from the year-ago quarter, and 2 percent from the 39 percent in Q2 2004. Ciscos router revenue dipped in the third quarter, falling 3 percent from both the year-ago quarter (26 percent) and Q2 2004 (26 percent).

The U.S. was once again Ciscos biggest market, accounting for 46 percent of product bookings, followed by Europe-the Middle East and Africa (EMEA), at 31 percent. Chambers was especially optimistic about Ciscos performance in the EMEA region: [G]iven normal seasonality and economic challenges in several of the large countries, orders from Europe continue to be a little better than we expected, he confirmed.

Elsewhere, Chambers was bullish on the alliance that Cisco announced earlier this month with Scandinavian telecommunications giant Ericcsson: While time will tell if the strategic Cisco-Ericsson alliance develops the way we hope it will, the alliance could represent in the service provider market he same type of opportunities that the IBM-Cisco alliance represents in the enterprise market.

So does the burgeoning economic recovery have legs? Cisco seems to think so although Chambers tempered his general optimism about the recovery with healthy paranoia, of course. CEOs are beginning to be more optimistic not just about the economy, but also about their own industries and companies, as expected and hoped for, we are beginning to see them loosen their own purse strings on spending, he said. [We] could see a return to cautious spending if [global] events were to deteriorate, although based on what we see at the present time, we do not view this as a likely scenario.

As a clue to just how far-fetched Cisco views this scenario to be, Chambers said that the networking giant will once again begin increasing its employee headcount. For the first time in three years, you saw us add 200 incremental head count this quarter, and while we will be very selective in the placement of new resources into new growth areas, we have made the decision to add approximately 1,000 people in the remainder of this calendar year, primarily to our engineering and sales ranks, he asserted, noting that the majority of these positions will be in the U.S. We realize that there is some business risk in this aggressive approach, but we think the risk-reward factors favor these long term investments. Chambers stressed, however, that Ciscos productivity goals of $700,000 in revenue per employee remain in force. -Stephen Swoyer