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Margins Hit by New Product Launches, Will Improve: Cisco CEO

A large reason behind the pressure in Cisco System's gross margins this past quarter had to do with new product launches, Cisco CEO John Chambers told CNBC on Thursday. But, he said, he expects this to improve with time.

"At any time you announce products into a new product area, they start at lower gross margins and grow over a period of time. Almost all our products are new, and you will see us improve in gross margins."

Cisco earned 37 cents a share in the second quarter, excluding items and beating forecasts. Gross margins, however, fell to 62.4 percent from 64.3 percent. The company gave a disappointing third quarter outlook, which sent its shares down nearly 9 percent in extended trade.

Prospects and Challenges

Chambers pointed out that public sector spending, which makes up 22 percent of Cisco's global revenue, would "remain challenging". Local governments in the U.S. have been cutting spending in the face of falling revenues and warnings of major defaults. At the same time, fiscal austerity measures in Europecould also cause big cutbacks in government spending. But Chambers said he expects growth to come from the enterprise, commercial and service provider businesses which make up 20 percent to 35 percent of Cisco's overall revenue.

"All of those showed better trending, especially in the second and third month of this last quarter than in the first month. That's where I think we are going to see growth."

In terms of geography, he said he expected an improvement in performance in Europe, while Asia was "positioned for very good growth going forward".