Cisco Systems Inc. investors are urging Chief Executive Officer John Chambers to shed low-margin consumer products. Photographer: Timothy A. Clary/AFP/Getty Images
Chief Executive Officer of Cisco Systems Inc. John Chambers. Photographer: Andrew Harrer/Bloomberg
Cisco Systems Inc. (CSCO) investors say
Chief Executive Officer John Chambers ought to shed low-margin
consumer products after his expansion into 30 new businesses
slowed sales growth and distracted management.
Chambers wrote in an April 4 memo to staff that he will
make several “targeted moves” in the coming weeks to restore
lost credibility and sharpen the company’s focus. Getting out of
the consumer division, which includes the Flip video camera,
Linksys home networking, audio and media-storage products,
should top his to-do list, said Sean Conner, an analyst at
Nuveen Asset Management in Minneapolis.
“Cisco has realized that’s a crappy business,” said
Conner, who said his firm sold its Cisco stake in January after
owning shares for more than five years. “There are no synergies
with the rest of their business. A lot of these businesses they
put together are hurting the overall puzzle.”
Conner said he’ll consider repurchasing Cisco stock,
depending on the outcome of Chambers’s moves.
Cisco’s gross margin, a measure of profitability, narrowed
to 64 percent last fiscal year from 70 percent in 2003, in part
a reflection of the push into consumer products. A sale or
spinoff would help Chambers achieve his goal of refocusing on
areas where Cisco is a leader, including the high-margin
networking gear that makes up about half of its revenue.
“I look at Cisco as more an enterprise player,” said Dan Morgan, a fund manager at Synovus Securities Inc., which owned
about $18 million in Cisco shares at year-end, according to
Bloomberg data. “The consumer is not a natural extension.”
‘Give Up the Ghost’
Chambers should also consider retrenching from some of the
other 30 new businesses Cisco has entered in recent years, said
Joanna Makris, an analyst at Mizuho Securities USA Inc. in New
York. These include niche products that help companies manage
data centers -- areas led by Riverbed Technology Inc. (RVBD), F5
Networks Inc. (FFIV) and Aruba Networks Inc. (ARUN)
“Cisco has to give up the ghost at this point,” Makris
said. “They’ve lost so much share and thought leadership. It’s
too late to out-innovate other companies in these areas.”
Cisco’s stock has fallen 32 percent in the past year,
erasing about $46.6 billion in market value. The shares declined
16 cents to $17.91 on the Nasdaq Stock Market at 4 p.m. New York
time. Karen Tillman, a spokeswoman for San Jose, California-
based Cisco, declined to comment.
Switching Competitors
The company faces mounting competition in switches,
equipment used to direct Internet traffic, Chambers said today
at a conference for investors in San Francisco. Rivals are
undercutting Cisco on price, he said.
“Switching is our challenge,” said Chambers, who told the
crowd that his memo earlier this week was a “call to action.”
“It’s going to be a tough market for us.”
Part of the overhaul is under way. In February, Cisco named
10-year veteran Gary Moore as chief operating officer, a new
position. He’s charged with making mangers more accountable,
shaping the company’s strategic priorities and improving
operational execution.
The move may bring more predictability to Cisco’s business,
said Rob Whiteley, an analyst at Forrester Research Inc. Cisco
has said it introduced products at a faster pace in the past
year than in previous periods. This has made it harder to
coordinate manufacturing and new software releases with the rest
of the company’s schedules, Whitely said.
Victim of Success?
“Cisco has been a victim of its own success,” said
Whiteley, whose firm is based in Cambridge, Massachusetts. “It
created a system to spin up new products quickly. They need an
executive to cut across all the projects and silos.”
Some investors lauded Chambers’s memo. Trading of bullish
Cisco options that can be exercised in May surged yesterday,
indicating that investors anticipate share price gains after
Chambers begins acting on the plan outlined in his memo.
Cisco options traders buying new bullish contracts have
pushed the ratio of puts to sell versus calls to buy, a gauge of
bearishness, to 0.62-to-1, the lowest since July 2008.
Other changes may include an overhaul of Cisco’s management
structure. Chambers introduced a nontraditional form of
management in 2007, installing councils and committees to make
decisions collaboratively. The structure was designed to
encourage communication as the company expanded.
Slow Decisions
The company has become “slow to make decisions,” Chambers
wrote in the memo. “We have lost the accountability that has
been a hallmark of our ability to execute consistently for our
shareholders.” He didn’t attribute those shortcomings to the
councils and committees.
“The management matrix is very confusing,” said Kim Caughey, an analyst at Fort Pitt Capital Group Inc. in
Pittsburgh, which has $1.1 billion under management and doesn’t
own Cisco shares. “People need to have fewer meetings and do
more work.”
Cisco’s vision has been to provide a wide range of
networking products, from videoconferencing kits that consumers
plug into living room TVs to the high-end switches and routers
that handle network traffic.
Persuading investors to support this one-stop-shop approach
has proven tough.
Erick Maronak, who oversees $2 billion in Victory Capital
Management Inc.’s large cap growth fund, considered buying Cisco
shares recently after owning them from 1991 to 2002. He came
away from his research unconvinced that Cisco could keep up the
growth, he said.
Times Have Changed
“Cisco just can’t seem to get it humming the way it used
to,” said Maronak, who owns Cisco rivals F5, Riverbed and
Juniper Networks Inc. (JNPR) “It has to do with their size, but also
the products that are custom built for today’s networks are
probably better at competing companies.”
Given Cisco’s record in past years of achieving revenue and
profit growth, investors would be wise to give Chambers time to
refine the company’s focus, said Morgan at Synovus.
“They used to just do routers and switches,” said Morgan,
who has owned Cisco since the early 1990s. “That was the Cisco
thing and it worked for them. Then they started getting into all
this other stuff. It’s kind of confusing.”
To contact the reporter on this story:
Joseph Galante in San Francisco at
jgalante3@bloomberg.net
To contact the editor responsible for this story:
Thomas Giles at
tgiles5@bloomberg.net