Cisco wants a piece of the blade server pie but would it cope with the slim margin?

Cisco's margin structure could be a challenge for the network giant as it crosses over into the server hardware business, according to IBM's hardware chief, in an interview with ChannelWeb. Robert Moffat, senior VP and group exec of IBM's Systems & Technology Group described Cisco's new interest in the data center as "crossing what I call the demilitarized zone between networking and data centers." Cisco is widely reported to be readying a blade server that will compete with devices from established blade server vendors IBM, HP and Dell. So why would Cisco's margin structure be a problem?

I asked our resident numbers man, Brad Reese to look into that question and this is what he came up (see below). Brad says: "Looking at IBM and HP gross margins and comparing them to Cisco, should Cisco choose to enter IBM and HP's markets, Cisco will take a 'big reduction' to its gross margin in order to compete."

Cisco Gross Margins for the 3 months ended Oct. 25, 2008:
 
Product: 65.5%
Services: 60.6%
Total: 64.7%
 
(See page 41 of Cisco's Form 10-Q) 
 
IBM Gross Margins for the 3 months ended Sep. 30, 2008:
 
Global Technology Services: 32.7%
Global Business Services: 27.4%
Systems and Technology: 36.2%
Software: 84.7%
Global Financing: 49.1%
Other: 15.7%
Total: 43.3%
 
(See page 28 of IBM's Form 10-Q)   

HP Gross Margin for the 3 months ended Jul. 31, 2008:
 
Total: 24.2%
 
(See page 50 of HP's Form 10-Q) 

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