Cisco at a Crossroads: Back to Basics or Continued Expansion?

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Critics are starting to wonder if Cisco may be better off focusing on its networking core and shedding some of its non-core businesses such as the consumer camcorder Flip, the Cius tablet project, or even the lower-end Linksys router line.

(Reuters) - For years, the question at Cisco Systems Inc (NASDAQ:CSCO) was what to buy next, expanding from routers and switches into consumer electronics in an effort to keep its revenue rising by double digits.

Now, the question may be what to cut or sell off.

Since Cisco reported a weak outlook and lower-than-expected margins this month, investors and analysts wonder if it would be better off without some of its less successful businesses, including consumer router unit Linksys.

"What investors would like is to see them more focused on their core market, like routers, switches and data centers, and de-emphasize or even exit some of these consumer businesses," said Morningstar analyst Grady Burkett.

"We want to see Cisco accept the fact that it's not going to grow in the mid-teens, or the 12 to 17 percent that they've been targeting, and instead focus on returning capital to shareholders and defending its core markets."

Analysts also mentioned cable set-top box unit Scientific Atlanta, as well as products like Cius -- a tablet computer for business users -- as things it could drop.

Cisco is trimming back marketing expenses for consumer products, including its new home videoconferencing system Umi, and is not preparing a sale of assets, according to company sources who declined to be named. But some investors and analysts said bolder steps may be needed.

A sale of Linksys and Scientific Atlanta would have been unthinkable until recently. A key part of Chambers' strategy has been to sell consumer products that help drive Internet traffic, and thus, boost demand for its routers and switches.

But in the most recent quarter, orders for consumer products fell 15 percent last quarter from a year earlier.

"In the longer term I wouldn't be upset to see those businesses go," said Channing Smith, managing director for Capital Advisors Growth Fund, referring to both Linksys and Scientific Atlanta. His fund owns Cisco shares.

"Consumer technology is changing rapidly and there are big players like Apple and Google entering that space."