BOSTON/NEW YORK - Cisco Systems Inc will ditch its Flip video camera division as it overhauls its troubled consumer business, following chief John Chambers' recent admission that the company had lost its way.
The move comes less than a week after Chambers said that he had to make some "tough decisions" about cutting spending on some product areas.
The company plans to cut 550 jobs from its workforce of 73,000 and take a pre-tax charge of about $300 million for the overhaul. The charge is expected to be recognized in the third and fourth quarters of fiscal 2011.
Tuesday's news appears to be Chambers' first move toward reorganizing the company. Among the steps, Cisco plans to combine its lackluster Umi home teleconferencing service with its popular TelePresence business product. The company will also change the way it manufactures its Linksys line of networking equipment.
"Cisco has been sliding for a long time now. Hopefully they can right the ship," said Fred Hickey, editor of the High-Tech Strategist newsletter.
He said that Cisco has been hit harder than other companies during the economic downturn because it has lost its focus on its business of selling networking equipment at a time when it faces increased competition from rivals including Hewlett-Packard Co, Juniper Networks, China's Huawei [HWT.UL] and ZTE Corp.
Analysts were encouraged by Tuesday's changes, adding that they hoped Cisco would divest more products outside of its business selling routers and switches to the technology and telecommunications industries.
"This is one step in concentrating the focus of Cisco on the enterprise," said Tim Ghriskey, chief investment officer of the Solaris Group. "This came faster than we would have expected. But perhaps Cisco has been studying this for a while."
Cisco shares were down 9 cents at $17.38 in Nasdaq trading. Shares have lost a third of their value over the past year. Including that slide, Cisco has lost slightly more than half its value since the start of 2001, when it was almost worth $40 a share.
CONSUMER DISTRACTION
Analysts have been particularly critical of the way Cisco has managed its consumer division, saying it strays too far from the company's main business.
Evercore analyst Alkesh Shah he expects Cisco to make other changes to its far-flung portfolio of technology products, which includes Scientific Atlanta cable TV boxes and a new line of computer servers.
"This is just the beginning a series of likely changes and the series of changes are likely to bring down costs and raise margins," Shah said.
The networking giant bought the Flip business from Pure Digital for $590 million in 2009, part of an acquisition spree that bolstered its consumer-oriented business and included the acquisition of cable set-top box maker Scientific-Atlanta and home router maker Linksys.
It has since lost its cachet as a hot gadget, primarily because mobile phones makers now offer devices with similar functions incorporated into their handsets.
In February, Jonathan Kaplan, the former CEO of Pure Digital who had headed up Cisco's consumer division, left the company.
It was unclear why Cisco decided to shut down the Flip business -- which comes with software called FlipShare that allows users to easily share videos on sites like YouTube -- rather than sell it.
"They announced they are shutting it down, so that implies that they were unable to sell it," said Philip Alling, an analyst with Atlantic Equities. "It's disappointing they wouldn't be able to generate any proceeds from sale of the business."
Cisco spokeswoman Karen Tillman declined to say why the company decided to kill the business rather than sell it.
Chambers has previously called on the company to focus on five areas: routing, switching and services; collaboration; data center virtualization; architectures; and video.
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