Flip or No-Flip, Cisco Is Still a Mess

Cisco (Nasdaq: CSCO  ) didn’t follow the Kubler-Ross five stages of grief model to a T, but it appears that the company and CEO John Chambers have finally made it to the final stage in which it is ready to accept that it must change its business model in the face of changing industry dynamics. On Tuesday the company announced that it would essentially be shutting down its failing consumer unit by ceasing production of its Flip camcorder business and shifting its ridiculously priced Umi teleconferencing products into its business portfolio. Cisco will also let go of 550 workers, an unfortunate consequence of the company’s mismanagement, but an important step in beginning to streamline the company’s operations. 

While Cisco’s road to nowhere took many years of mismanagement led by a once heralded and revered CEO, the company’s road to acceptance only started in November with Chambers' now infamous “air pocket” comments. This was Chambers' first steadfast denial that things were awry at the company -- even though, as I wrote at the time, it was obvious that more than just air pockets were impeding Cisco’s progress. While Tuesday’s announcement and acceptance of the problem mark the beginning of a possible turning point for the company, it could take years for Cisco to get back on track.

Cisco’s issues are deeper than consumer business
Cisco’s foray into consumer products was poorly managed and ill-timed, but the decline of this business should be the least of Cisco’s worries. The company’s consumer business only accounted for 2%-3% of total bookings in its most recent fiscal quarter, so dumping the business won’t have a significant effect on Cisco’s top line growth. However, as Cisco’s focus and direction skidded off the tracks as it looked to develop these smaller niche units, more dexterous competitors were stealing market share in its core businesses. 

Chambers' decision to provide end-to-end datacenter computing solutions created enemies out of former friends IBM (NYSE: IBM  ) and Hewlett-Packard (NYSE: HPQ  ) . The hurt was felt directly in its switch business, its most important and largest unit accounting for about a third of the company’s total sales. Here Juniper Networks (NYSE: JNPR  ) is significantly cutting into market share with the help of strategic partnerships with IBM, among other vendors. Other companies like F5 Networks (Nasdaq: FFIV  ) , Riverbed Technology (Nasdaq: RVBD  ) , and Aruba Networks are also growing faster and taking market share in a variety of growth networking markets that Cisco has struggled to keep up in.

Some of Cisco’s recent struggles to grow revenue can also be due to the company’s overdependence on public sector spending. Apparently, Chambers and company thought that well would never run dry.

Acquisitions?
While Cisco’s biggest position of strength is its enormous cash and short term investment balance of more than $40 billion, I don’t believe acquisitions hold the promise they once did for the company. A huge possible acquisition of EMC (NYSE: EMC  ) was rumored throughout 2009, but that seems unlikely now and the cost has probably at least doubled in conjunction with EMC’s share price. 

In fact, much of Cisco’s growth has been fueled by strong and strategic acquisitions. While the company has continued to make small acquisitions to supplement its ever growing portfolio of businesses, significant purchases seem to be a thing of the past. That being said, realistically, the company might be better served as a somewhat smaller, agile, and more focused company to compete more effectively with some of its competitors that have been chipping away at Cisco’s market share.

A longer row to hoe
Acceptance and acknowledgment that change is needed at Cisco was a big first step for John Chambers, and eliminating the consumer unit was another important -- if very small -- decision. Unfortunately for Cisco shareholders the years of attempting to build out non-complementary businesses will take time to unwind.

Cisco’s shares have gotten much cheaper as the company has waddled through the last year, but I still don’t think that makes it a value. Value doesn’t really matter much if growth doesn’t seem to be on the horizon, and Cisco may be better served to actually step back a bit before it can move forward.

In addition, if you like the world of cheap, big, old, and stodgy tech companies look no further than Intel, Hewlett-Packard, and Microsoft, which all trade at a discount to Cisco when looking at the enterprise value/EBITDA ratio. I say let the vanilla mutual funds continue to load up on these stocks and look elsewhere.  There are better values accompanied by growth to find in the market.

 To follow all news on Cisco, add the company to our new watchlist service today!

Andrew Bond owns no shares in the companies listed. Riverbed Technology is a Motley Fool Rule Breakers recommendation. Intel and Microsoft are Motley Fool Inside Value recommendations. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool has created a bull call spread position on Cisco Systems. Motley Fool Options has recommended a diagonal call position on Intel. Motley Fool Alpha LLC owns shares of Cisco Systems and Microsoft. Motley Fool Alpha LLC has opened a short position on Juniper Networks. Juniper Networks is a Motley Fool Big Short short-sale pick. The Fool owns shares of Intel, International Business Machines, EMC, and Microsoft. The Fool has bought calls on Intel. You can follow Andrew on Twitter @Bond0 or on his RSS feed. Try any of our Foolish newsletters today, free for 30 days. The Fool has a disclosure policy.


Read/Post Comments (8) | Recommend This Article (15)

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  • Report this Comment On April 13, 2011, at 7:17 PM, Netteligent09 wrote:

    Decisions have been made. Cisco is not ready to move forward unless it cuts lose and restructure company with focus and target market.

    Most of the investors are sitting on sideline.

    Plan to accumulate Cisco shares after the upcoming Earning Release...and more shares after the end of fiscal year 2011.

  • Report this Comment On April 13, 2011, at 8:45 PM, andresmitchell wrote:

    Accumulate? Why? This is one of the most poorly run companies in the country. It is certainly the most poorly managed company in the Dow and the CEO couldn't manage a lemonade stand. This thing is a sell/short until John Chambers is gone. He still believes their strategy is "fundamentally sound" which must mean that their strategy includes losing money for investors. Stay away. This quarter could be the worst in company history. The stock is going to get rocked.

  • Report this Comment On April 13, 2011, at 9:25 PM, kutani123 wrote:

    It's DEFINITELY right on the money and all fault are with Chambers 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.

    2. Bad and loose management process allowing a bunch of useless, incompetent executive management team continues acquire more companies WITHOUT a clue what to do with it particular in Consumer business.

    3.Failed to transform (SA) cable STB company to IP based STB after 5years and got beaten bad by Motorola

    4. Failed to transform Consumer Linksys to a Services Providers and got beaten badly by DLink, Netgear and most by then 2Wire now as Pace

    Chambers has his last chance and MUST do it right to save Cisco.

    He needs to bite the bullet and do the following as priority

    1. CUT COST CUT COST CUT COSTASAP

    Killed FLIP and layoff 550 jobs are DEFINITELY NOT enough

    Reduce the ops cost and “FAT” work force (now 73,000) as too many “waste” and “useless”, "stand alone" high level management resources

    (VPs, Sr Dirs, Dirs..)

    Get rid of entire CONSUMER business as SA, Linksys, Flip are DEAD business and recently Tanberg along Umi (it's a joke to users), and lot of other junk project, which NEVER be a $B market, such as health care, sport entertainment, network management, Media service/CMSG, Internet business, tablet/Cius and many many more

    2. Re-strategy the acquisition process (increase work forces for nothing and won't be able to integrate to its portfolio products) and concentrate on core business, only expand to some sound emerging technology.

    3. Cut cost and scale DOWN India off-shore as one wonder about the India productivity with tons of resource there. Smell VERY VERY VERY FISHY and NOT effective oof-shore at all.

    If he CAN'T do it fast then Cisco musthave new CERO similar to Mark Hurd comes in toi CLEAN UP the mess and lay out the new business model to move forward

    Else soon Juniper, Hwawei, HP, Alcatel, Riverbed etc.. will EAT Cisco ALIVE!!!!

  • Report this Comment On April 13, 2011, at 9:31 PM, kutani123 wrote:

    Sorry for some typo in the previous comments!!

  • Report this Comment On April 14, 2011, at 12:31 AM, vinhn wrote:

    Well said: "many years of mismanagement led by a once heralded and revered CEO". Cisco did layoffs in 2009 while many of its competitors continued to invest. It caused many experienced employees joined Juniper, Brocade, and Huawei. In two years these people helped competitors to surpass Cisco in many areas. It is not simply Flip, Linksys, or Scientific Atlanta. As the favoritism to off-shore/India development and most engineering teams under heavy Indian management influence, the culture has turned from delivery to promises/talks. There is no silver bullet to turn it around. Let's see.

  • Report this Comment On April 14, 2011, at 4:52 AM, Netteligent09 wrote:

    We pay just as dearly for our triumphs as we do for our defeats. It is a price to pay for daring to get what we want out of life. Failure is the opportunity to begin again and Cisco has to find solutions for the next 3 to 5 years.

    I have been watching Cisco and Linksys closely during the past 6 years with frustration but did not know how to stop self-destruction.

    CEO John Chamber acquired Linksys with a right strategy and vision from a beginning. He even gave many blank checks and let management decided for themselves. When people has too much cash in hands, most likely they will do something foolish. Unfortunately Cisco Management do not have DNA to run startup company or understand market they serve. Wasted so much money and resource. No successful design wins or product launches. Cisco keeps hiring many wrong people and too many Chiefs.

    Like Cisco, there is still hope in Consumer Group to turn around. Cisco Consumer Group needs to be restructure and focus on its strength and growing billion dollars market segment. CCG is perfectly suitable where Cisco left off. There are many ways to improve margin, increase profitability, no debt and no need for big investment. What a great way to start a company.

    CCG can focus on integrated CPE Broadband for Triple Play Services and the next generation IP STB to compliment Cisco, a viable broadband solution to increase revenue for existing products and increase sales of complementary Cisco products worlwide.

    The next generation 3G and 4G ADV wireless and its applications require WiFi and Broadband to meet a huge demands and address many challenges. Technologies are mature. Solution is ready.

    After it is proven, CCG can launch SMB version. Customers have options with Cisco rather than go somewhere else. Competition is healthy and fun. It is worth living for.

    Once proven, Cisco can outsource many low margin products to CCG and let them handle these products.

    Can you imagine every home or SMB have Cisco in it? Cisco brandname and its quality are very powerful. Newly CCG can accomplish all of these objecties without having many Directors and V.P. Trim all the fat.

    I would change my mind not to accumulate Cisco' shares as planned until further progress. My past failures with Cisco for a same reason. Thanks to Anremitchell.

    Disclosure: I whoheartedly believe in Cisco, even after I paid the price dearly in the past.

  • Report this Comment On April 14, 2011, at 5:05 AM, Netteligent09 wrote:

    Huawei, HP, Alcatel-Lucent, Juniper, Infinera, Tellabs, Brocade are stepping their plans and are playing to win.. It's Not So Important Who Starts the Game but Who Finishes.

    If EMC has VMware and Costco has Kirkland, Cisco Consumer Group can help to share workload and unload pressure. Market is healthy but Ethernet switches and integrated service routers for SMB will become commodity for years to come. If Cisco do it right, CCG can be a formidable team.

  • Report this Comment On April 15, 2011, at 3:46 PM, BradReeseCom wrote:

    H Andrew,

    Beware Cisco of how the mighty fall.

    A Primer on the Warning Signs:

    Stage 1: Hubris Born of Success

    Stage 1 kicks in when people become arrogant, regarding success virtually as an entitlement, and they lose sight of the true underlying factors that created success in the first place.

    An Example of Cisco Hubris:

    Fast Company December 2008: Taken to its ambitious conclusion, Chambers wants customers to remake their companies in Cisco's image, a prospect possible only because of their dependence on Cisco technology. "Without changing the structure of your organization," Chambers told the analysts in September, "I would argue that [innovation] will not work."

    Stage 2: Undisciplined Pursuit of More

    Stage 2 leads to more scale, more growth, more acclaim, more of whatever those in power see as "success."

    "We're so great, we can do anything."

    An Example of Cisco's Pursuit of More:

    Business Week May 2009: Chambers tells BusinessWeek that Cisco likely will hit a total of 50 fresh markets within a year. "We're moving into new [areas] with a speed nobody has ever attempted," he says.

    Stage 3: Denial of Risk and Peril

    As companies move into Stage 3, internal warning signs begin to mount, yet external results remain strong enough to "explain away" disturbing data or to suggest that the difficulties are "temporary" or "cyclic" or "not that bad," and "nothing is fundamentally wrong." In Stage 3, leaders discount negative data, amplify positive data, and put a positive spin on ambiguous data.

    An Example of Cisco's Denial of Risk and Peril:

    Starting with a 2007 sales base that was $22 billion less than Cisco's 2007 sales base, Huawei grew its 2008 sales $880 million more than Cisco grew its 2008 sales. For the first 9 months of its FY09, Cisco net sales plummeted $1.59 billion while simultaneously Cisco net income sank $985 million.

    Stage 4: Grasping for Salvation

    The cumulative peril and/or risks gone bad of Stage 3 assert themselves, throwing the enterprise into a sharp decline visible to all. Those who grasp for salvation have fallen into Stage 4. Common "saviors" include a charismatic visionary leader, a bold but untested strategy, a radical transformation, a dramatic cultural revolution, a hoped-for blockbuster product, a "game-changing" acquisition, or any number of other silver-bullet solutions. Initial results from taking dramatic action may appear positive, but they do not last.

    An Example of Cisco grasping for salvation:

    Cisco CEO John Chambers' memo to Cisco employees blaming them for what ails Cisco and the closing down of Flip.

    Stage 5: Capitulation to Irrelevance or Death

    The longer a company remains in Stage 4, repeatedly grasping for silver bullets, the more likely it will spiral downward. In Stage 5, accumulated setbacks and expensive false starts erode financial strength and individual spirit to such an extent that leaders abandon all hope of building a great future.

    Sincerely,

    Brad Reese

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