Why Cisco Flipped on Flip

NEW YORK ( TheStreet) -- Desperate times call for desperate measures, and Cisco's ( CSCO) decision to kill off its Flip video camera division less than two years after plunking down $590 million to buy it is likely to be popular on Wall Street.

"We believe that Cisco's announcement to restructure its consumer business will be applauded by the market this morning," said Brian White, an analyst at Ticonderoga Securities, in a note released on Tuesday. "The Street never fell in love with Cisco's consumer strategy and the Flip product line was the epitome of this disdain."

Cisco CEO John Chambers admitted last week that the company had disappointed its investors, and vowed to execute better after two consecutive quarters of weak outlook.

The first part of Chamber's overhaul aims to address the company's consumer business, which Cisco noted had plunged 15% year-over-year during its recent fiscal second-quarter, weighing heavily on the firm's gross margin.

Sales of Flip cameras, ironically, were up 15% year-over-year, but, as Chambers admitted during the earnings conference call, that wasn't enough. "We were looking more in the 30s in terms of the growth for the Flip architecture," he said.

Cisco, in spending more than half a billion dollars on Flip, massively underestimated the changing nature of the video market. The explosion in high-definition video on smartphones, tablets and in video calling has clearly overtaken consumers' appetite for devices like the Flip.

"The announcement to shut down the Flip product line is a wise decision, in our view, as the world has changed significantly over the past couple of years with the proliferation of smartphones such as Apple's ( AAPL) iPhone 4 offering similar capabilities," said Ticonderoga's White.

Video is a Cisco mantra, with the tech bellwether attempting in recent years to push as much traffic as possible across service provider and enterprise networks. And while sales of video-centric ultrafast routers can provide a growing source revenue for the firm, Flip sales obviously failed to reach critical mass.

Cisco's overhaul of its consumer business will also see the firm cut 550 jobs and a restructuring of its Linksys WiFi home networking division, and the company will integrate its Umi home videoconferencing technology into its Business TelePresence product line.

Strangely, Cisco has no plans to recoup the money spent on Flip by selling it. "We made an evaluation of the business and made a decision to shut it down," said a Cisco spokeswoman, declining to provide any additional details to TheStreet.

With a hoard of more than $40 billion, Cisco is not exactly hurting for money, although the company will soon start paying a dividend to shareholders.

Cisco likely wants to avoid the distractions involved in selling off the Flip unit, focusing instead on getting its house in order. As John Chambers said in his memo to employees last week: "We have lost some of the credibility that is foundational to Cisco's success -- and we must earn it back."

Cisco shares were dipping slightly during midday trading Tuesday, down about 0.57% to $17.37.

--Written by James Rogers in New York.

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