Polycom Posted Disappointing 1Q

Zacks

Yesterday, after market close,  Polycom Inc. (PLCM) declared disappointing financial results for the first quarter of 2012, missing the Zacks Consensus Estimates. Management cited continuation of sales execution problem in the North American region and sales fluctuations in the Asia-Pacific region as the primary reason for the poor performance. In synergy with these negative factors, the stock price of Polycom dropped by $0.68 (5.11%) in the after market trade on NASDAQ to $12.62.

GAAP net income in the first quarter of 2012 was $15.1 million or 8 cents per share compared with a net income of $34 million or 19 cents per share in the prior-year quarter. However, adjusted (excluding special items) EPS in the reported quarter was 12 cents, missing the Zacks Consensus Estimate of 14 cents.

Total revenue in the first quarter of 2012 was $367.5 million, up 7% year over year, but well below the Zacks Consensus Estimate of $373 million. Segment wise, UC Group Systems revenue was $240 million, up 5% year over year. UC Personal Devices revenue was $67 million, up 8% year over year. UC Platform (Network Infrastructure) revenue was $60 million, up 12% year over year.

Geographic Distribution of Sales

In the first quarter of 2012, the American region generated approximately $179 million of revenue, up 2% year over year. Europe, Middle East, and Africa generated $100 million, up 16% year over year. Asia Pacific region accounted for the remaining $88 million, up 7% year over year.

Margins

Gross margin in the reported quarter was 60% compared with 58.7% in the year-ago quarter. Operating expenses in the first quarter were $195.6 million, up 15.4% year over year. Quarterly operating margin was 5.4% compared with 10.5% in the year-ago quarter.

Balance Sheet

At the end of the first quarter of fiscal 2012, Polycom had nearly $618 million of cash & investments and no outstanding debt on its balance sheet compared with $591.6 million of cash & investments and no outstanding debt at the end of fiscal 2011.

Cash Flow

During the first quarter of fiscal 2012, cash flow from operations was over $32 million compared with $45.6 million in the prior-year quarter. Free cash flow (cash flow from operation less capital expenditure) in the previous quarter was $16.2 million compared with nearly $30.8 million in the year-ago quarter.

Near Term Concerns

Currently, major concern for Polycom is its lukewarm performance in the most important North American regions. The company is significantly suffering in this region for the last couple of quarters, mainly due to poor execution problems of marketing and sales. Management has done several restructurings, which are yet to generate fruitful results. The problem seems to be double-edged (1) growing competitive pressure and (2) precipitous macro-economic fluctuations, resulting in volatile tech spending.  

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 its acquisition of 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 video conferencing market through the purchase of LifeSize Communications Inc. Further, Logitech acquired Italian firm Mirial, a leading videoconferencing 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. Acquisition of Skype will enable Microsoft to offer videoconferencing from desktop computers.

Our Recommendation

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. Currently, it holds a short-term Zacks #3 Rank (Hold) on the stock.

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