Cisco Systems Inc posted stronger-than-expected quarterly results and Chief Executive John Chambers said some customers were seeing stabilization for the first time in many quarters.

The news sent shares of the network equipment maker up 3 percent in after-hours trading, boding well for the technology sector and broader U.S. markets.

They are seeing some stabilization, a leveling out, or in other words, they are finally beginning to have something reasonably solid underneath their feet, Chambers said of how Cisco customers are describing their current business.

But he warned shareholders to not get too far ahead of themselves in building on the positives of this quarter, as there was no way of knowing when the turnaround would be and the market could fall again.

Cisco posted a smaller-than-expected drop in profit thanks to cost cuts, which helped offset a 16.6 percent fall in revenue to $8.2 billion in the fiscal third quarter ended April 25. Analysts were expecting $8.1 billion, according to Reuters Estimates.

Net profit fell to $1.3 billion, or 23 cents a share, from $1.8 billion, or 29 cents a share, a year ago. Earnings excluding items fell to 30 cents from 38 cents, and was above analysts' average estimate of 25 cents.

Cisco positively surprised on earnings by a significant margin and unlike a lot of other companies we've seen this quarter, they also surprised on revenues, said Tim Ghriskey, chief investment officer at Solaris Asset Management.

Big-cap tech was actually the worst-performing sector in the market today and we think that was because of fears that Cisco might disappoint in earnings and we've seen just the opposite here. Most likely we're in for a good start for the day tomorrow, especially in technology.

Cisco is the biggest U.S. maker of routers and switches, which direct Internet traffic. It recently expanded into software, services, and consumer electronics. Its results are often seen as a benchmark for the overall technology sector.

Tighter credit and the recession have discouraged many of Cisco's customers from big technology investments. But Cisco has been cutting costs to help protect its bottom line. Total operating expenses fell to $3.6 billion from $4.1 billion, the company said.

Cisco forecast a drop in current-quarter revenue of 17 percent to 20 percent year-on-year. That compared with Wall Street's expectation for a 19 percent decline to $8.36 billion, according to Reuters Estimates.

The company said it would continue to maintain tight financial management, but that large-scale layoffs and salary reductions were avoidable for now.

Cisco also said its long-term revenue growth target of 12 percent to 17 percent was still possible.

They are not immune from the contraction in the enterprise IT arena and the retrenchment of enterprise spending clearly continued through the end of April. But they've managed to maintain a fairly tight operation, said Barry Jaruzelski, vice president at Booz & Co.

They have an increasing cash balance so they are in good stead, but the market continues to be extremely challenging.

Analysts have said that Cisco's results and outlook could provide global investors with a better idea of the depth of the current downturn and possible timing of a recovery.

U.S. Federal Reserve Chairman Ben Bernanke said on Tuesday that he was hopeful that the economic decline would moderate considerably in the near term, and return to positive growth by the end of the year.

Cisco shares rose 3.2 percent to $20.24 in after-hours trading, after closing at $19.61 on Nasdaq.

(Additional reporting by Chuck Mikolajczak in New York and Clare Baldwin in San Francisco; Editing by Richard Chang and Tiffany Wu)