Yesterday, after the market closed, Polycom Inc. (PLCM) declared its financial results for the second quarter of 2012. The company has missed the Zacks Consensus Estimates. Furthermore, management provided a weak financial outlook for the rest of 2012.
GAAP net income in the second quarter of 2012 was $7.0 million or 4 cents per share compared to a net income of $29 million or 16 cents per share in the prior-year quarter. However, adjusted (excluding special items) earnings per share in the reported quarter were 11 cents, and thus missed the Zacks Consensus Estimate by a penny.
Total revenue in the second quarter of 2012 was $358.5 million, up 5% year over year, and almost in line with the Zacks Consensus Estimate of $359 million. Segment wise, UC Group Systems revenue was $251.7 million, up 7% year over year. UC Personal Devices revenue was $42.9 million, down 3% year over year. UC Platform (Network Infrastructure) revenue was $63.9 million, up 6% year over year.
Geographic Distribution of Sales
In the second quarter of 2012, the American region generated revenues of approximately $177.7 million, up 3% year over year. Europe, Middle East, and Africa generated $80.4 million, down 2% year over year. Asia-Pacific accounted for the remaining $100.4 million, up 16% year over year.
Gross margin in the reported quarter was 60.9% compared with 62.9% in the year-ago quarter. Operating expenses in the second quarter were $210.2 million, up 19.2% year over year. Quarterly operating margin was 13.1% compared with 16.3% in the year-ago quarter.
At the end of the second quarter of fiscal 2012, Polycom had nearly $614.9 million of cash & investments on its balance sheet compared with $591.6 million of cash & investments at the end of fiscal 2011. Its balance sheet remained clear of any outstanding debt at the end of the second quarter.
During the first half of fiscal 2012, cash flow from operations was over $73.4 million compared with $130.9 million in the prior-year quarter. Free cash flow (cash flow from operation less capital expenditures) in the previous quarter was $37.9 million, compared with nearly $98.9 million in the year-ago quarter.
Management provided a weak guidance for the second half of 2012. For third quarter of 2012, the company expects revenues in the range of $325–$335 million and earnings per share of 6–9 cents. For the fourth quarter of 2012, the company expects revenues to be in the range of $355–$365 million and earnings per share of 15–17 cents.
Competition Looms Large
The uniform collaborative communications market is fiercely competitive, resulting in cut-throat pricing strategy. Cisco Systems Inc. (CSCO) became the major player after it acquired Tandberg TV. New players such as Logitech International S.A. (LOGI) and Microsoft Corp. (MSFT), despite being a partner of Polycom, make the competitive landscape more intense.
Logitech entered into the video conferencing market through the purchase of LifeSize Communications Inc. Further, Logitech acquired Italian firm Mirial, a leading video conferencing solution provider to offer video-calling on tablets and other mobile handhelds.
Microsoft has acquired Skype, a leading developer of free video-calling software for PCs and other digital devices. The acquisition of Skype will enable Microsoft to offer video conferencing from desktop computers.
As of now, Polycom remains the only pure-play unified collaborative solutions provider. The company stands to gain as enterprises, governments, and educational institutions increasingly recognize the productivity-enhancing benefits of video conferencing.
We thus maintain our long-term Neutral recommendation on Polycom. However, based on management’s weak financial guidance for the rest of the year, PLCM currently holds a short-term Zacks #4 Rank (Sell) on the stock.
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