Tomorrow, Cisco holds it big analyst day at its campus. The company is likely to give an update about its business, and also how the demand for CRS-1, their big honking router is shaping up, and what are the plans to counter, Juniper’s new Matrix platform, which is going after the very same high end market.

While most analysts are expecting a good show of sorts, but there are still some nagging doubts, according to First Global, a British research group, which is one of the few who are bearish on Cisco’s prospects. In May 2004, they thought that the stock was too expensive and would under perform the stock markets. It did – by 21.6% versus the NASDAQ composite.

Like them I am worried about the margin pressure on the company, especially with low cost competitors in China becoming increasingly aggressive, both in their ambition and prices. First Global estimates that the company’s gross margins have declined by 119 basis points sequentially and 149 basis points Y-o-Y to 67.2% in Q1 FY05. In the previous quarter, Cisco had shown its muscle by making dollars on its high end products, while in the most recent quarter the low-end Linksys product line drove the sales. That is a disturbing trend, given that most investors now look at price to earnings number and not price-to-sales number.

So far Cisco is keeping the competitors at bay by maintaining minimal hiring and squeezing operational efficiencies. Full marks to the company for that! Still other issues remain: the market for Cisco’s bread and butter switches (43% of total sales) is getting intense, especially with other vendors showing signs of desperation. The company is still seeing substantial market share losses in the high-end router segment to Juniper Networks (JNPR). My biggest worry is what if someone from Asia scoops up Avici which is gasping for breath at present? That means price pressure at the top of the pyramid as well.