Cisco Is Half-Right to Kill the Flip

Cisco Systems (Nasdaq: CSCO  ) flipped the switch Tuesday. Responding to criticism of its flailing entree into consumer electronics, the company announced it will "restructure" CE. Cisco will:

  • Integrate its controversial (-ly priced) umi home videoconferencing product into its existing "Business TelePresence" line.
  • "Assess" its core video technology for integration into other businesses "or other market opportunities" (read "sell the business").
  • Kill the Flip video recorder.

Kudos, Cisco
As I argued last month, this is the right move for Cisco -- sort of. Recall: The whole idea behind buying Flip (and developing umi, and building a wireless stereo, rushing heedlessly into competition with Apple (Nasdaq: AAPL  ) , Research In Motion (Nasdaq: RIMM  ) , and Hewlett-Packard (NYSE: HPQ  ) with its Cius tablet concept) was that Cisco wanted to support the use of Internet video.

Logically, this would inspire Internet providers to buy more switches, routers, and other doo-dads from Cisco to support all the extra traffic. Where Cisco went wrong was in forgetting that Apple, RIM, and HP already make products that support this need. That Amazon.com (Nasdaq: AMZN  ) and Netflix (Nasdaq: NFLX  ) already offer services boosting bandwidth demand. That, in short, there was no need for Cisco to be in CE at all. Now this fact has dawned on Cisco, and it's killing Flip -- which is so close to the right decision, it's painful to watch.

What Cisco should be doing, of course, is selling Flip to someone who might make a profit off the product -- Sony (NYSE: SNE  ) or Apple, perhaps -- and riding that player's coattails. Or selling to someone who probably won't make a profit, but has a history of paying up for bad ideas (I'm talking to you, HP).

Instead, Cisco's killing Flip and recording a loss that it claims won't exceed $300 million -- which isn't even close to the truth. In fact, Cisco paid $590 million to acquire Flip two years ago, and unless the company decided to kill Flip because it's embarrassingly profitable, I doubt it earned the $290 million needed to make up the difference between what Cisco paid, and what it's now writing off as a mistake.

Foolish takeaway
So Cisco's really only half-right -- but there's good news here for investors, too: At an enterprise value less than eight times the amount of cash it churns out in a year, and a forward growth rate of 10.4%, Cisco can afford to be half-wrong. Yes, Cisco tripped over Flip. But the stock is a good value regardless.

Want to keep track of Cisco's efforts to right the ship? Add it to your Watchlist today.

Fool contributor Rich Smith has no position in any stocks named above. The Motley Fool has a disclosure policy.

Apple, Amazon.com, and Netflix are Motley Fool Stock Advisor recommendations. The Fool has written puts on Apple. The Fool has created a bull call spread position on Cisco Systems. Motley Fool Alpha LLC has bought puts on Netflix. Motley Fool Options has recommended a bull call spread position on Apple. The Fool owns shares of Apple. Motley Fool Alpha LLC owns shares of Cisco Systems.

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Read/Post Comments (4) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 12, 2011, at 10:38 PM, andresmitchell wrote:

    I agree, there is some good news for investors. Unfortunately it is vastly outweighed by the bad news that the worst CEO in corporate America is still running the company. They should shed all underperforming assets, including John Chambers. The guy is just awful. He makes Steve Ballmer look like a genius.

  • Report this Comment On April 12, 2011, at 11:47 PM, kutani123 wrote:

    Yes It's all Chambers fault as

    1. Did NOT learn the lesson at .com burst by continues hiring more resource even though have NOTHING good for them to work on, acquisition for thing that he and his useless, incompetent executives management team who have NO clue or strategy about Consumer business and marketing.

    Even DON'T know/have any idea, strategy to integrate those technologies to their portfolio product lines

    2. Miserably failed to transform Scientific Atlanta (SA) cable STB company to IP based STB after 5years and got beaten bad by Motorola

    3. Miserably transform Consumer Linksys to a Services providers and got beaten badly by DLink, Netgear and most by then 2Wire now as Pace

    Look at Tanberg as it'll be rotten in the next 2 years as first failure to use it to produce Umi as a JOKE to user and consumers

    Kill FLIP and layoff 550 is DEFINITELY NOT enough as MUST kill the entire useless executives management team and the entire Consumer business along with many many junk projects

    Chambers MUST go and Cisco needs a new blood CEO such as Mark Hurd to come in and CLEAN UP the entire mess of management and business structure.

    Cisco should lay off 50% workforce with out any serious impact

  • Report this Comment On April 13, 2011, at 12:50 AM, SimchaStein wrote:

    Foolish article indeed. True, CSCO is smart to get rid of FLIP. But selling to AAPL is beyond foolish. AAPL would never buy someone else's neglected products. The author needs to think a little harder.

  • Report this Comment On April 13, 2011, at 7:03 AM, weiwentg wrote:

    I feel that Cisco is better off getting out of the consumer segment entirely and focusing on their core strength in enterprise.

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