UPDATE: Cisco To Exit Flip Business, Cut Jobs, In Realignment

Cisco Systems Inc. (CSCO) will curtail some of its consumer operations, including shuttering its Flip video camcorder business, in an admission that its multi-year campaign to build a consumer brand has largely failed.

Cisco plans to cut 550 jobs in its fiscal fourth quarter and take a roughly $300 million charge to cut back on several of its businesses, from Flip to its consumer video-conferencing product.

The changes come after Chief Executive John Chambers conceded in a memo last week that the company had suffered a lapse in operational execution, and had confused customers and disappointed investors. A few days later, Chambers warned that the company would have to cut back on several areas, making "tough decisions" on where to shut off spending to preserve profitability.

Cisco's consumer ambitions were seen as the most likely target as the company looks to redouble its efforts in its core networking equipment business. The company spent heavily to build a consumer brand, hiring celebrities such as Ellen Page to star in its commercials and paying for product placement in high-profile shows such as "24." Yet the products yielded slower growth and were less profitable, and often confused Wall Street on how they fit into Cisco's portfolio.

"The consumer business has been a drag," said Catherine Trebnick, an analyst at Avian Securities. "It hasn't panned out the way they thought it would."

The Flip video camera business, in particular, was seen as an anomaly. The camera was a product of Cisco's acquisition of Pure Digital Technologies Inc., which it purchased for $590 million two years ago. While it played along with Cisco's strategy of pushing more video through the network, it had virtually no other connection to the company's other products.

Yet Cisco and pitchman Chambers were quick to talk up the camera. Chambers shot videos on the device, and constantly brought it out during television interviews. Cisco aired a number of commercials featuring random family moments or trick camera shots promoting the product. It also tapped P. Diddy to design a custom Flip camera that was sold in December.

Despite Chambers' large aspirations for Flip, the business failed to make a major dent with consumers, as people could choose to go with alternatives or simply use their smartphones to shoot high-definition video.

The first red flags appeared after the holiday season, when Cisco warned that the consumer products business failed to grow as quickly as it had first expected. Consumer spending for other products, however, was relatively strong, Trebnick said.

In February, Cisco said sales of consumer products fell 15% and weighed on companywide gross margin in its fiscal second quarter. Companywide, profit fell 18% as margins slid for the fourth consecutive quarter

A day later, it announced that the head of its consumer-products business, Jonathan Kaplan, would leave the company to pursue "other career opportunities." He came to the company in 2009 when it purchased Pure Digital, where he served as chief executive.

Cisco is also folding its ill-received umi, which was positioned as a high-end video conferencing product for consumers, into its business telepresence line.

Likewise, other businesses not cut will be integrated into other existing segments.

While Cisco spread its attention in as many 30 different directions, smaller and more nimble rivals took advantage and began taking market share. Companies such as Juniper Networks Inc. (JNPR), Riverbed Technology Inc. (RVBD) and Aruba Networks Inc. (ARUN) all reported strong results relative to Cisco.

A Cisco spokesman wasn't immediately available to comment on whether more job cuts were required. The company employees 72,935 employees, according to its website.

Mark Sue, an analyst for RBC Capital, believes Cisco will need to do more, including potentially divesting its home networking business and set-top business.

"Other businesses are under review so there should be more (cuts)," Sue said.

-By Roger Cheng, Dow Jones Newswires; 212-416-2153; roger.cheng@dowjones.com

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