SAN JOSE, Aug. 11 -- Cisco Systems yesterday reported sales grew 26% vs. last year and 5% sequentially in the recently concluded July quarter but warned that sales in the current quarter may fall disappoint the Street.

The maker of telecom and networking gear forecast sales would be flat to up 2% sequentially, and year-on-year growth would slow to 16 to 18%.

For the just completed July quarter, router demand rose 12% sequentially and switches were up 3%. However, the company's ratio of inventories to cost-of-goods-sold (COGS) climbed sequentially, and turns dropped to 6.2, from 6.3.

In a research note published today, Deutsche Bank warned that climbing inventories among OEMs of communications equipment could shake the recovery of the EMS sector. "EMS production rates of communications gear has increased 15% since the Nov./Dec. quarter (normally flat to down 10%). We believe this is largely a result of building inventories at Cisco and other [communications] OEMs (Lucent, Ericsson, Motorola)."

Cisco buys about $4 billion worth of goods and services from North American top tier EMS vendors, according to DB, making it one of the largest EMS customers. Major suppliers to Cisco include Celestica (about 10% of revenue), Solectron (13%) and Jabil (about 15%).

"Cisco`s slowing sales growth and inventory build reinforces our view that the peak of the current tech cycle is near," DB analyst Chris Whitemore wrote.

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