Analysis: Some Cisco investors urge an exit from set-top box unit

Wed Dec 11, 2013 7:05am EST
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By Sinead Carew

NEW YORK (Reuters) - Cisco Systems Inc Chief Executive John Chambers is facing growing pressure from investors to exit its television set-top box business, where revenue has been plummeting and profit margins trail the rest of the company.

The problem is that there are few obvious buyers for the unit - the former Scientific Atlanta that Cisco bought for $6.9 billion in 2005 - so Chambers might have no choice but to close the business, analysts said.

Cisco stunned the market on November 13 by warning that revenue would fall as much as 10 percent this quarter and keep declining for several quarters. It blamed everything from emerging economy weakness and political backlash in China to company-specific problems, such as market share losses in network equipment and declining sales in set-top boxes.

Investors are hoping Chambers gives a clear break-down of the individual impact of all these problems at Cisco's Financial Analysts Conference on Thursday.

But for many, the ailing set-top box business has emerged as a particular sore spot. Raymond James analyst Simon Leopold said it could represent as much as a third of Cisco's roughly $1 billion revenue miss for its current quarter.

The unit, which generates roughly 5 percent of total revenue, had a 20 percent decline in sales in Cisco's first fiscal quarter ended in October. And Chambers has warned that the decline in this business would continue for "a number of quarters," but did not say when it might improve.

With such a bleak outlook, it might be time for the company to move on from the "past its prime" set-top box business, said Peter Karazeris, an analyst at Thrivent Asset Management, which holds 4 million Cisco shares among its $82 billion in managed assets.

"I'd like to see more definitive action there," said Karazeris, who sees a strategy change as a potential boost for the stock at a time when Cisco investors have little to look forward to. "I think this is diluting the attention."   Continued...

A Cisco logo is seen at its customer briefing centre in Beijing, November 14, 2013. REUTERS/Kim Kyung-Hoon