Back in May 2009, Cisco (Nasdaq:CSCO) shelled out $590 million for Pure Digital Technologies, which was the maker of the highly popular Flip video camera. In the press release, the company declared that the deal would take its “consumer business to the next level.”
Hmmm … was this a higher or lower level?
This week, we got the answer. Cisco announced Tuesday that it will take a $300 million charge and lay off 550 jobs as it shutters its Flip operations.
Of course, tech deals can be dicey. The integration process can bog down development and result in culture clashes. And of course, there are usually many hungry upstarts that are ready to pounce.
Yet in the case of Cisco, the Flip deal does highlight its lack of savvy with the consumer tech market. First of all, there wasn’t much ongoing innovation and development of the product. Then again, Cisco is a complex maze of committees and product lines. It’s the kind of environment that can be deadly for bold, new ideas.
What’s more, Cisco showed that it lacked a basic understanding of the changing market for devices. Apple’s (Nasdaq:AAPL) iPhone and Google’s (Nasdaq:GOOG) Android offerings were getting traction in the market. A big reason was that the devices made it easy to post pictures on Facebook, Flickr, YouTube and other popular social networking sites.
As for Flip? There was no Internet connectivity.
However, Apple’s introduction of the iPhone 4 was the game-changer. By introducing high-definition video, there wasn’t much to differentiate Flip. Who needs two devices?
But the shutdown of the Flip line is likely only the first step. It looks like Cisco will gut other consumer products as well. In the most recent quarter, this division saw a 15% fall in business. This was the case even though the Christmas season was strong for electronic devices.
Responding to the problems, Cisco’s CEO, John Chambers, recently sent out a memo to his troops and mentioned that there will need to be some tough decisions. Unfortunately, the strategic plan was fuzzy. This is a bad sign since Chambers’ letter was 1,500 words (shouldn’t that be enough to provide a clear road map for the future?)
Again, this is in striking contrast to Apple. Is there any lack of clarity of the vision at Apple? With just a handful of slides, Steve Jobs can dazzle customers and get them clamoring for new products. There is no need for memos.
True, Cisco’s stock is trading at a seemingly attractive valuation, with a price-earnings ratio of 13. In fact, if you strip its $40 billion cash hoard, the multiple is a mere 8.
But the reality is that Cisco has a mess to clean up. And it will take more than a couple quarters.
In the meantime, Cisco’s competitors will continue to chip away at its core switching and router business. With 70% of the market share, it’s a fat target and still commands hefty margins. But companies like Juniper Networks (Nasdaq:JNPR), Huawei and Acme Packet (Nasdaq:APKT) are making headway.
So with pressure on margins and a need for a deep restructuring, Cisco’s stock is likely to tread water for some time.