Cisco Systems' low-end network switch products will face
less of a threat from smaller rival Dell Computer, which is backing
away from aggressive growth targets in that market, Salomon Smith
Barney said on Wednesday.However, Cisco, the world's largest maker of
equipment that directs Internet traffic, still faces challenges
from weak demand and a struggling economy, analyst Alex Henderson
wrote in a note to clients after Dell chief operating officer Kevin
Rollins met with another Salomon analyst on Tuesday.
Analysts view personal computer maker Dell as
a small but significant rival in the market for inexpensive
switches, which direct traffic on a network. They have said Dell's
low-cost approach will eventually hurt Cisco's strong gross profit
margins.
However, Henderson said Rollins indicated Dell
is changing its switch strategy, including classifying them as a
"tier 2" opportunity and backing away from its goal of making it a
$2 billion business in three to five years.
Dell also is not going to aggressively target
the switch market through direct marketing, but will let sales grow
gradually, Henderson said. The company still intends to move up the
switch lineup, adding more products, but does not expect to invest
as much in research and development, he said.
"We think this is a significant departure from
Dell's previous strategy, but we don't want to overplay this as a
positive for Cisco," Henderson said, adding that Cisco still faces
threats from numerous other competitors. He has an "outperform"
rating on the stock.
"However, without Dell leading the charge
against Cisco, it's unlikely you'll get the same penetration,"
Henderson said. "We think the challenge to Cisco is much less
daunting if Dell isn't full behind the attack."
A Dell spokeswoman said Rollins' comments are
in line with past comments and switches remain an expansion
opportunity.
"This isn't a retraction of any sort for us
because we've never provided any market share projections," Dell
spokeswoman Mary Fad said.
"There may be a reprioritisation, but I do
still think that switches are going to remain important to us," she
added. "They're still going to complement our core business."
Henderson said Cisco still faces soft demand
for its products, with February demand looking weak and the July
outlook likely to be pressured.
Cisco's stock was up 7 cents at $13.70, while
Dell's was up 25 cents at $26.38, in late morning trading on the
Nasdaq.