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No discounts from Cisco

Execs from the data networking leader remain hopeful that they can maintain a sales model that relies on huge margins.

SAN FRANCISCO--Executives from data networking leader Cisco Systems remain hopeful that they can maintain a sales model that relies on huge margins as the company moves into new markets and faces increased competition from unexpected corners.

The company, hosting an annual update for financial and industry analysts here this week, was unexpectedly forthright in divulging its business plans going forward.

Chief executive John Chambers and others among Cisco's executive team said they did not feel the compunction to discount their technology in markets where others are low-balling them, and will maintain margins of 50 to 60 percent going forward.

The expectations are significant due to Cisco's newfound thrust to compete in the market to provide next-generation equipment to support voice on networks, a sprawling sector that includes huge foes such as Lucent Technologies, Nortel Networks, Siemens, and Alcatel, among others. Given this emphasis to replace older circuit-based equipment, which Chambers has referred to as a "dinosaur infrastructure," the company may face market conditions it has yet to be exposed to, according to some observers.

On the flip side, this slew of telecommunications-oriented equipment providers want a piece of the data pie dominated by Cisco--potentially at any cost--in a bid to reap the financial rewards of the convergence trend. They also want to be a part of any converged network shift, even if it means evolving from their roots in providing circuit equipment, long a cash cow.

Cisco estimates that competitors who dominate the circuit-based world sustain themselves on 30 to 40 percent margins, which could shrink, according to Cisco, due to technology evolutions brought on by the new demands of carriers and service providers for voice and data support within the equipment they purchase.

Cisco has hyped convergence as a huge opportunity, in part, because it sees the expected move from classic circuit-based equipment to data-based devices as a shift that caters to its classic specialty--providing the infrastructure for the Net.

"I believe we're the only company in the industry that truly controls our destiny," said a bullish Chambers, who noted that the networking sector is in "the early innings" of growth.

Cisco posted another strong quarter, in terms of profits, amid uncertainty in the networking market. Others, such as 3Com, met estimates for their most recent quarter, but they did so with essentially flat revenues.

Some believe Cisco's focus on the next-generation carrier equipment market is an outgrowth of its current position as the king of data networking.

"Cisco doesn't have the telecom partner so they have to be talking about this big time," said Mike McConnell, an analyst with industry researcher Infonetics.

Cisco has made overtures in the past to companies in the voice world, but decided to go it alone due to increasing product overlaps with the likes of Lucent and Nortel. Those discussions are currently under regulatory scrutiny.

But the company remains convinced that what it calls the "conversion" to a data-based infrastructure for voice feeds right into its hand.

"We're trying to change the nature of the telecom industry," said Kevin Kennedy, senior vice president for Cisco's service provider line of business.

"We just have to try and continue to grow up," Kennedy continued. "We've been an evolutionary company for a decade. The greatness is we aren't shackled by a legacy, but we have to execute."

Separately, in response to a question concerning the bevy of new competitors Cisco faces as it trains it sights on the voice equipment market, Chambers made it clear it may represent an increasingly antagonistic era for the company.

"They play by different rules," Chambers said. "We've never had a suit in our industry until the new players came in."

The chief executive was referencing the ongoing legal wranglings between Cisco and Lucent, initiated by the latter this past June.