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Cable Operators

Cisco to Offload Set-Top Plant

7/25/2011 12:01 AM Eastern

Cisco Systems is saying adiós to its set-top box
manufacturing facility in Juarez, Mexico — but the
company insisted it remains as committed as ever to developing
boxes for cable customers.

The networking giant, which acquired the plant with
the $6.9 billion acquisition of Scientific Atlanta in 2006,
announced plans to sell it to electronics maker Foxconn
Technology Group.

Cisco also said it will reduce its workforce by about 6,500
worldwide, representing 9% of its full-time employees, as
part of a goal to lop off $1 billion in annual operating costs.

In addition, with the sale of the set-top box manufacturing
facility, approximately 5,000 people employed in
Juarez are set to become employees of Foxconn in the first
quarter of fiscal 2012. Cisco said it expected no job losses
as a result of the sale. The deal is subject to regulatory approvals
and is projected to close by October.

The Juarez facility manufactures video and telecommunications
equipment for the service provider market.

The divestiture of the plant “is at least a tangible recognition
that [set-tops are] a less-core portion of the business
going forward,” SNL Kagan senior analyst Ian Olgeirson
said. “In the near term, it’s less about the volume of boxes
decreasing and more about how important they are in the
architecture as operators look for ways to shift that gatekeeper
role out of the home and to the network.”

CONTRACTING STRATEGY

According to Cisco, the deal brings the company’s video-equipment
manufacturing in line with its overall strategy
of “partnering with world-class contract manufacturers to
deliver the highest-quality products to customers.”

“Today’s announcement further simplifies and consolidates
Cisco’s manufacturing operations,” Cisco chief operating
officer Gary Moore said in a statement. “After working
closely with Foxconn for many years, we know they are a
strong strategic fit with Cisco’s long-term goals and are
committed to a successful future in North America.”

“We remain fully committed to our service provider
customers and partners, and will continue investing in
existing and new video platforms, including set-top boxes,
as part of our Videoscape vision,” Moore added.

In the second half of 2010, Cisco’s set-top business
plummeted.

For the quarter ended Oct. 30, 2010, Cisco’s traditional
set-top business fell 40% among North American cable
operators. In the following quarter sales of cable set-tops
dropped 29%, and box orders decreased 15% year-over-year.

RUN RATE DOWN IN Q2

For Cisco’s second quarter of fiscal 2011, which ended Jan.
29, 2011, the set-top business had an annualized run rate of
approximately $1.6 billion — down from about $2 billion
just three months earlier. Cisco did not break out results for
set-tops for the most recent quarter, which ended April 30.

However, selling the plant does not mean Cisco is downgrading
the importance of the set-top business, In-Stat analyst
Mike Paxton said.

“It just means they’re attempting to tighten up their cost
structure and balance sheet,” he said. “Owning the Juarez
[set-top box] plant was never a comfortable fit for them,”
given that the company used an outsourced contracting
model for the rest of its products.

The layoffs Cisco announced last week include approximately
2,100 employees who elected to participate in a
voluntary early retirement program, and Cisco noted the
staff reductions include a total of approximately 15% of
vice president-level and above employees.

In connection with the layoffs, Cisco estimates that it will
recognize total pre-tax restructuring charges of not more
than $1.3 billion over several
quarters, comprising
severance and other onetime
termination benefits.

Cisco said it expects that
about $750 million of these
charges will be recognized
during the fourth quarter
of fiscal 2011, including approximately
$500 million
relating to the voluntary
early-retirement program.
The remaining balance of
the charges is expected to
be recognized during fiscal
2012.

SLASHING COSTS

CISCO LAST WEEK ANNOUNCED:

• Plans to sell the 5,000-employee set-top manufacturing
plant in Juarez, Mexico, to Foxconn.


• Elimination
of 6,500 jobs, including 2,100 voluntary retirement
packages.

• Staff reductions of 15% of VP-level and above employees.

SOURCE: Cisco

 

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