Arik Hesseldahl

Recent Posts by Arik Hesseldahl

Cisco Is Keeping Its TV Set-Top Box Business, and That’s That

Shares of networking giant Cisco Systems closed at their lowest levels in seven months after CEO John Chambers and other executives met with analysts in New York.

At the meeting, CFO Frank Calderoni took down the range for Cisco’s growth outlook to between three percent and six percent over the next three to five years. Previously, the expectation had been for sales growth of between five percent and seven percent. That was the main motivation for today’s selloff. Cisco shares fell by about two percent to $20.51. The shares have risen by about four percent this year.

On another front, Cisco has been under pressure to either sell or shut down its TV set-top box business, the former Scientific Atlanta, for which it paid about $7 billion in 2005. Sales in the unit have been declining, and the profit the unit generates doesn’t match those of other players.

The problem with that, the company’s president said later, is that keeping the unit allows Cisco to maintain crucial relationships with TV service providers that generate other business.

This makes a certain amount of sense. A set-top box is a foot in the door with the cable and satellite companies so that Cisco can sell them other things. Remember NDS? That’s the Israel-based video software company that Cisco acquired for $5 billion last year, its largest deal of the last few years.

Service provider video had been a bright spot, accounting for $2.1 billion, or about 17 percent of sales, as recently as the quarter that ended in July. But sales in that business declined 14 percent year on year in the most recent quarter.

Analysts are staying cautious. An early assessment from Brian Marshall of ISI says Cisco is more likely to hit the lower end of that new growth range, given all the negative factors lining up against the company for now.

Marshall likes Cisco’s new emphasis on cloud computing. Cisco tends to see the cloud as a networking and software problem rather than one of computing capacity, and all 13 of its most recent acquisitions have either been cloud-centric or software-focused companies. “We believe this cloud focus ties nicely into the company’s commitment to stabilize its financial model with more recurring, predictable revenue streams,” he wrote in a note to clients today.

One thing is sure: Something has to happen at Cisco. After disappointing the markets with earnings that came in well below expectations and guidance that was worse, Cisco shares have come down by about 13 percent. Chambers and his team promised shareholders they would “get the stock up.” At this moment it’s unclear how that will happen without a more drastic change.

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