Cisco on Tuesday posted a solid third quarter, with revenues and earnings slightly better than Wall Street expectations. But the company was challenged in some product and geographical areas, and Cisco also felt the impact of softness in the U.S. and European enterprise markets.(Compare Cisco products.)

Cisco remains cautiously optimistic, tempering its guidance for the current fourth fiscal quarter to 9% to 10% revenue growth, down from its long-term target of 12% to 17%.

As for the short-term, we grade Cisco on its third quarter performance:

Overall quarter: A-

Revenue of $9.8 billion was up 10% from last year's third quarter, and above the mid-point of Cisco guidance, in an economy teetering on recession. Earnings beat estimates and were up 12% for the year ago period.

Enterprise: B

Product orders globally rose 9%. In the United States, orders, excluding federal government, were only up in the mid-single digits because of the cautious environment on the overall economy. Federal orders were up 20%. Cisco expects spending in the United States to pick up by year-end. Emerging markets, up to now a significant growth engine for Cisco, decreased by mid-teens figures.

"Lackluster U.S. order growth (down from 12% last quarter) reflected a sharp decline in U.S. service provider orders and weak U.S. enterprise orders (down from 11% last quarter)," states Oppenheimer & Co. analyst Ittai Kidron in a report on Cisco's quarter. "It is clear that challenges in the macro environment are affecting Cisco."

Service provider: C

Orders grew only 6%. In the United States, they declined by 3% after 12 quarters in a row of over 20% growth. A bright spot – high-end router revenue grew 25%, led by the CRS-1, which grew 150%.

Commercial: A

The market segment with the highest growth in orders, at 18%. This business unit targets small-to-midsize enterprises.

Consumer: B+

The next highest order growth, at 13%, for the business unit that includes the Linksys wireless product line.

Among the major product categories…

Routing: B

Revenue grew 14%, driven by high-end routing at 25% and more specifically by the CRS-1 core router at 150%.

Switching: C-

Revenue grew only 3%. Fixed configuration switch sales grew while modulars declined because of evaluation of the impact of the new Nexus 7000 and 5000 data center switches.

Advanced Technologies: B+

This segment, which includes unified communications/collaboration, video, security and wireless, grew revenue 17%. Particularly strong were unified communications at 45%, WebEx conferencing and collaboration product at 20%, and TelePresence videoconferencing, which grew 1,000% from a very small base. Cisco says more than 500 units of TelePresence have been ordered since the system's introduction in October 2006.

Services: B+

This is fast becoming a key high growth business for Cisco. Revenue was $1.6 billion, up 15% from a year ago. Cisco is looking to grow services 20% per year and have it account for one-fifth – or roughly $8 billion – of the company's overall revenue.

Other highlights

Other highlights in the quarter included shipment of the 4 millionth Integrated Services Router (ISR). The ISRs are branch routers with multiservice capabilities, including voice, and one of Cisco's most successful product lines.

Cisco also announced intentions to acquire data center switch start-up Nuova Systems; unveiled its next-generation data center switch, the Nexus 7000, and Nexus 5000 from Nuova Systems; and its next-generation edge router platform, the ASR 1000. 

Routing and data center switching will be key for Cisco to hit its overall 12% to 17% growth target. So will mergers and acquisitions, according to UBS Warburg analyst Nikos Theodosopoulos.

"Longer term, we believe Cisco will have to aggressively pursue large scale M&A in order to drive sales growth towards its target range of 12% to 17%," Theodosopoulos writes in a bulletin on Cisco's third quarter. "Data center and unified communications appear to us as areas of solid growth potential."