Cisco Pulls the Plug on Flip
Following two consecutive fiscal quarters, Cisco Systems shocked the industry three weeks ago with the news that it will cease to manufacture its popular Flip video camera and will lay off the division’s 550 workers, substantially reducing its consumer businesses.
Also within the past two weeks, Cisco unveiled a voluntary retirement program aimed at workers 50 years old whose age plus tenure at the company equals 60; these workers have from May 10 through June 24 to opt in. This is the first time in two years that Cisco instituted such a cost cutting policy.
Cisco recently hired Gary Moore as Chief Operating Officer to fine tune its re-focused initiatives.
Then yesterday (May 5) Cisco, headquartered in San Jose, CA announced more dramatic actions to get back on track. With its heretofore unchallenged dominance in networking switches and routers, now under attack by Arista, Hewlett-Packard, Juniper Networks and others, Cisco announced it is reorganizing and streamlining its management operations and structure. In the past year, Cisco (like many high tech Titans) has seen a number of key executives defect to rivals. Longtime CEO John Chambers acknowledged in an April memo that the departures had slowed decision-making and caused lapses in operational execution. The net result: confusion among customers, dissension among company investors and lots of worry on Wall Street.
Yesterday’s initiatives are aimed at simplifying and re-focusing the company’s focus around its core competencies in switches and routers, even as Cisco eyes transitioning those products to the cloud. Going forward, Cisco will re-organize operations around specific geographic areas and customer segments. Chambers believes this will enable mid and lower level managers to make decisions autonomously and respond more swiftly to customers and changing market dynamics.
“It’s time to simplify the way we execute our strategy, and today’s announcement is a key step forward,” Chambers said in a prepared statement.
Cisco identified five areas of growth that are crucial to its success. They include: routing, switching and services; video; collaboration and Web-conferencing offerings; data-center virtualization and cloud computing, which are technologies that help companies outsource and streamline computing operations; and architectures for business transformation.
Cisco also unveiled some management changes. Senior vice presidents Pankaj Patel and Padmasree Warrior—who is also Cisco’s chief technology officer—were named to co-lead Cisco’s engineering group.
What the Moves Mean
Cisco has grown rapidly in the past decade, in large part through a flurry of well timed and targeted acquisitions. Unlike HP and Oracle, which are known for gobbling up very large competitors, Cisco’s Chambers prefers to acquire small and midsized firms that can boost Cisco’s presence in a particular market arena. This strategy has served Cisco well. It’s issued far fewer pink slips to employees than either HP or Oracle who have cut tens of thousands of workers in the past several years as they’ve absorbed industry giants. At the same time though, Cisco’s stock has been stagnant. As of today Cisco’s stock is at $17.62 which is at the bottom of its 52-week range of $16.52 to $26.80. On the plus side its profit margin is still a healthy 17.89% and its operating margin is a robust 21%. However, return on assets is only 7%, although return on equity is a respectable 17.38%. Chambers has always been fiscally responsible and it shows in the balance sheet. Cisco has $40.23 billion in cash and just $15.24 billion in debt.
Cisco will report its fiscal third-quarter earnings report next week. Wall Street, investors and competitors will be watching closely. It is imperative that Cisco jumpstart its momentum in switches and routers and repel rivals. Cisco must also score a big win with its cloud initiative. It’s no secret that nearly all the top tier high tech vendors are aiming for a dominant position in this emerging market. Financial analysts are openly wondering how long Chambers can hold out before he’s forced to lower prices on Cisco’s networking gear. Cisco must also executive and defend its position in its stated five core product/technology priorities: switches and routers; cloud computing and data centers; “architectures” (network design) and video.
As we said at the beginning of this article, all of the executive personnel and product changes underscore increasingly cutthroat, competitive market conditions. To stand still and do nothing is to fall by the wayside and effectively be shut out of the race.