Arik Hesseldahl

Recent Posts by Arik Hesseldahl

Cisco May Next Rid Itself of Linksys and WebEx

Remember the days when Cisco Systems was on an acquisition tear? Remember how it sometimes seemed there was no rhyme or reason to companies it was buying and how they would logically fit inside Cisco? The biggest example of this was Pure Digital, the company behind the popular and widely-emulated Flip Digital camera, and we all know how that turned out.

Now a report on the U.K.-based tech gossip site The Register suggests that Linksys, the consumer router company it acquired for $500 million in stock way back in 2003, and WebEx, the virtual meeting company it acquired for $2.9 billion in 2007, may be next.

Technically, this Linksys is nothing like the Linksys of old. Its dorky-looking blue wireless routers, sprouting antennas in every direction, were so popular at one point that they were nearly all you could find on store shelves when you needed one. Now those antennas are gone and Linksys-branded routers look like bathroom scales. Meanwhile, Cisco launched its Valet brand of home wireless routers, which are intended to make building a home network simple.

It’s hard to gauge the success of these products within Cisco because the company doesn’t break out results of its consumer products unit. However, one of the things that Cisco has said consistently is that consumer products weren’t performing well and that the consumer market saw sales declines year over year. “Customer preferences shifted toward lower price alternatives compared to our higher end product offerings, which adversely affected our overall revenue and gross margin.” It’s not hard to assume that statement applies to Linksys as readily as it did to the Flip unit.

Which brings us to WebEx. In its last full year of operation as an independent company, which was 2006, WebEx reported sales of $380 million and a profit of just shy of $49 million and operating margin of about 61 percent. It’s near impossible to tell from Cisco’s filings how well the unit has grown or not, or whether it has maintained its profitability since then. But it’s hard to see how its profitability hasn’t come under pressure from other collaboration products. The last time I did a WebEx meeting–and in fact the only time I ever do them–is when I’m talking to Cisco. And there are numerous competitors out there–GoToMeeting and Citrix come to mind. And then there’s Microsoft.

One of Microsoft’s plans for Skype, which it said it would acquire last week for $8.5 billion, has to include a WebEx-like iteration of Skype aimed at the enterprise. A fight with Microsoft usually means pricing pressure, which translates to lower profit margins. Cisco’s biggest problem right now is the profitability of its switching business which amounts to more than 30 percent of sales. The last thing it needs is a profit-sapping fight with Microsoft in market segment where its offering amounts to at best 2 percent or less of sales. Better to worry about Hewlett-Packard and Juniper, which is attacking Cisco in its core business.

Plus, WebEx may be a market leader in its segment. But over the long term, is it really all that special? As Chambers said on Cisco’s most recent earnings call and in an appearance on CNBC earlier this month, if you can differentiate yourself over the long term, then it’s best to cut back.

Cisco’s not saying anything about these reports, but when you think about it, they make a lot of sense. Cisco shares are trading up slightly this morning as the rumor is gaining traction, so the market seems to like it, albeit tentatively. Cisco has told the market that it plans to take $1 billion out of its annual operating expenses, plus it says to expect up to $190 million in restructuring charges. Add to that charges of up to $1.1 billion related to an early retirement program being offered to employees, and you get an idea of the scale of changes it’s planning between now and the end of July. Change is coming to Cisco, and it’s coming fast.