Is Cisco’s Restructuring Too Little, Too Late?

Government spending during the quarter is estimated to have fallen 8% over the year – not good news for Cisco, which gets 22% of its revenues from the sector and is already seeing troubled times. The company’s stock price fell 15% last year. During the current year, while the Dow Jones has gone up 10%, Cisco’s stock is among the worst performers, having recorded a 12% drop in the year. Recently, CEO John Chambers accepted Cisco’s failings and has stepped up effort to pull the company back on track.

Cisco’s Financials
Cisco’s (NASDAQ:CSCO) Q3 revenues grew 4.8% over the year to $10.87 billion with an EPS of $0.42. The market was expecting revenues of $10.86 billion for the quarter with earnings of $0.37.

Sales of routers grew 7% over the year to $1.9 billion and contributed 17% of total revenues. Switch sales, however, fell 9% over the year to $3.3 billion, contributing 31% of revenues. Revenues from newer products, which include Video Connected Home, collaboration technologies, security, wireless, and data center products, grew 15% over the year. Services offerings’ grew 14% and all other products rose 11%.

For the current quarter, the company projects revenues of $10.84 billion to $11.05 billion compared with the market’s expectations of $11.6 billion. Projected EPS of $0.37 to $0.39 was also short of the Street’s target of $0.41.

Cisco’s Reorganization
Recently, Chambers admitted that Cisco’s performance “disappointed” investors and “confused” its employees. To revamp the organization, Cisco has announced major organization structure changes. The new structure is expected to simplify the way the company operates by the reducing the number of decision-making cross-functional “councils” from nine to three. These councils will focus on expansion within enterprise, service providers, and emerging countries. Among areas of operations, Cisco’s businesses will now be concentrated on core routing, switching and services, collaboration, data center virtualization, architectures, and video.

The company launched these efforts by reducing focus from the consumer businesses. The restructuring will result in elimination of 550 jobs. Cisco has begun this process by shutting down its digital video camera business, Flip. Cisco bought Flip for $590 million in 2009. Last quarter, it was estimated to have contributed almost 1% of Cisco’s overall revenues. According to Cisco, smartphones were hindering Flip’s growth, which saw sales grow 15% last quarter, compared with the company’s expectations of 30% growth. Closing Flip will help Cisco to concentrate on the core enterprise segment. But, some believe that Cisco could have sold Flip to a company like Sony or Apple, instead of shutting it down, since Flip controlled 35% of the camcorder market share, was the best-selling camcorder on Amazon and delivered incomparable high-definition video quality.

Cisco’s Expansion Plans
During the quarter, Cisco continued with its acquisitions. It recently bought newScale Inc., a California-based privately held provider of software that delivers a service catalog and self-service portal for IT organizations to select and quickly deploy cloud services within their businesses. Through the acquisition, Cisco would be able to offer customers options to build, manage, provide, and scale their own private cloud infrastructure based on their requirements and available standardized service options. The terms of the deal were not disclosed.

Cisco is also working on offering different services to customers. Its recent agreement with Xerox, for instance, will enable Cisco to use Xerox’s cloud services on its own network hardware, and Xerox will be able to sell Cisco’s cloud computing products to its clients.

Cisco’s stock is trading at $16.93 with a market capitalization of $93.6 billion. It touched a 52-week low of $16.52 earlier last month.

Meanwhile, pricing pressure is increasing as competitors HP and Juniper launch new products that are much cheaper and offer similar functionalities. HP’s latest FlexNetwork architecture allows companies to run their own networks, making it cheaper and easier for them to switch vendors. Within servers too, last year, HP gained 2.3% market share over Cisco. HP’s recently released A 10500 switch will let organizations deliver high-definition video and other content at prices 35% to 40% cheaper than Cisco’s similar offering. Cisco will have to get its house in shape soon enough if it wishes to regain its advantage in the networking market.