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.

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.

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