Cisco is feeling the squeeze from larger telecoms equipment giants and has warned that its gross profit margin from traditional products will continue to drop.
According to its recent filing to the US Securities and Exchange Commission (SEC), following the end of its second fiscal quarter on 23 January, the networking firm said growth will be in lower margin remote access and switching products for SMEs. This market will grow at a faster rate than Cisco's traditional higher margin router and top-end switches.
Cisco also warned that it 'faces increased competitive pressure from large telecoms equipment suppliers such as Lucent, Ericsson and Nortel, and well-funded startups, which may adversely affect gross margins'.
To offset the competition, Cisco will invest heavily into research and development. The increase in R&D expense will overtake its sales growth rate. During the first six months of 1999, R&D grew by $221 million, or 12.6 per cent of net sales, compared with 11.9 per cent of net sales during the same period in 1998. The company is working on developments in digital subscriber line (DSL) technology and cable modems, among others.
In the filing, Cisco said it would continue to acquire companies to help fend off competition, but chief executive John Chambers has always been adamant that the vendor would not make a big acquisition.
But Cisco warned that its financial position and increased customer support demands means it will not be able to compete as effectively. According to the filing: 'Several of the company's current and potential competitors have greater financial, marketing and technical resources. Additionally, as customers in these markets complete infrastructure deployments, they may require greater levels of service, support and financing than the company has experienced.'
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