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Polycom, Inc. Q1 2009 Earnings Call Transcript / Polycom An Acquisition Target?

April 17, 2009 | Chris Payatagool

Yesterday Polycom, a leading player in telepresence, video and voice communications solutions with annual revenue of $1.1 billion, reported its first quarter results. As more and more companies are looking to cut their travel expenses, video conferencing is emerging as a strong market. Let's take a closer look at Polycom's results and the sector.

Q1 revenue was $225.4 million, down 13% y-o-y and 14% q-o-q. Net income was $8.0 million or $0.10 per share, down 44% from $14.2 million, or $0.16 per share last year. Non-GAAP net income was $22.5 million, or $0.27 per share. Analysts were expecting earnings of $0.26 per share on revenue of $234.3 million. For more background on Polycom and other video conferencing players, read Online Video Beneficiaries: Polycom, my interview with Polycom's CEO Robert Hagerty, and Q4 analysis of major players in online video.

Non-GAAP gross margin was 58.9%, down from 60% last quarter. Deferred revenues grew 8% y-o-y and 2% q-o-q to a record $115.2 million. It generated $26.8 million in positive operating cash flow and ended the quarter with $338.7 million in cash and investments and no debt.

By segment, video solutions revenue was $156.4 million, down 2% y-o-y and 11% q-o-q. Voice communications revenue was $69.0 million, down 31% y-o-y and 21% q-o-q. Within video solutions, video communications revenue was $124.3 million, down 5% y-o-y and 12% q-o-q. Network systems revenue was $32.1 million, up 10% y-o-y but down 6% q-o-q.

By region, North American revenues were down 13% y-o-y and 9% q-o-q. EMEA revenues were down 17% y-o-y and 23% q-o-q. Asia revenues decreased 6% y-o-y and 13% q-o-q. Latin America was down 20% y-o-y and 26% q-o-q.

For Q2, Polycom expects revenue to be flat to down 4% sequentially, indicating a range of $216.4 to $225.4 million, which is well below analysts' estimates of $240.8 million. Gross margin is expected to remain roughly flat sequentially.

One segment that has shown resilience even in the current poor economy is video collaboration. Telepresence combined with video and the supporting network infrastructure accounted for nearly 70% of Polycom's revenue. Its RPX and TPX Telepresence products grew 45% y-o-y and 32% q-o-q to over $10 million in revenue. According to Gartner, the telepresence market could reach $1.5 billion in annual revenue by 2010. Tandberg and Polycom currently dominate the market. According to Frost and Sullivan, Tandberg is the leader in the videoconferencing endpoints market in EMEA with 49.7% market share, and Polycom had a market share of 31% in 2007.

Polycom is looking to increase its market share with a broader product line that also addresses small and medium sized businesses and branch offices of larger entities. To this end, it recently introduced the QDX6000, a high-quality video product priced at $4,000.

It has also launched new CX5000 Unified Conference Station, earlier known as known as Microsoft Roundtable. Apart from Microsoft, Polycom also has strategic partnerships with Cisco and IBM. Tandberg also has strategic alliances with Cisco, and Microsoft as well as a very strong partnership with HP. Polycom could prove to be a worthy acquisition target for any of these giants. Of these, Cisco and HP have a strong focus on the telepresence market. Cisco could benefit from Polycom's focus on the SME market, in which it doesn't have any offerings. Polycom is currently trading around $17 with a market cap of about $1.5 billion. Cisco has a cash balance of about $29.5 billion while HP has a cash balance of $11.3 billion.

Both can afford Polycom easily.

polycom_chart.jpg[via sramana mitra]

Polycom, Inc. Q1 2009 Earnings Call Transcript

Robert Hagerty: Thank you Mike. To begin I would like to provide a few financial highlights. Later in the call Mike will go through the operating results in greater detail. For the first quarter revenues were $225.4 million representing a 14% sequential decrease from the fourth quarter and a 13% decrease from the year-ago period. We exited Q1 with a backlog of $42.9 million, down 28% sequentially and 27% year-over-year.

Polycom's deferred revenues grew to a record $115.2 million, up 2% sequentially and up 8% over the year-ago period. At the bottom line, non-GAAP earnings were $0.27 per diluted share, down 36% from the fourth quarter and down 25% from the year-ago period.

Despite feeling the pressure from the current economic environment in parts of our business during the first quarter we believe the core drivers of our business remain strong. In concert with these drivers we are implementing several initiatives designed to improve our top line performance and we continue to demonstrate success in managing our cost structure to drive profitability.

Let me now turn to these key drivers and initiatives. During the first quarter, video collaboration exhibited resilience and in some cases sharp growth even in the current economic environment. In fact, Telepresence was our fastest growing major product line in the first quarter and now combined with video and the supporting network infrastructure these products collectively comprised nearly 70% of Polycom's revenue.

Our RPX and TPX Telepresence products grew to double digit, sequential and 45% year-over-year growth crossing the $10 million quarterly revenue threshold for the first time in our history. In our view, the solid growth of this product line serves as a further validation that customer organizations of all sizes and types are benefiting from their investment in solutions that have an immediate and direct hard dollar ROI.

Over the last few months we also made significant strides in improving our network infrastructure that supports our video and Telepresence offerings. In the fourth quarter of last year we launched CMA, a comprehensive, scalable video network management solution that simplifies provisioning, scheduling and improves the management and ease of use of desktop, group video and Telepresence deployments.

A key component of this solution is CMA Desktop, a tightly integrated, enterprise quality desktop video application which allows customers to scale thousands of users and supporting high definition voice video and content. In Q1 we built our leadership in innovation with the launch of Polycom's Distributed Media Application (DMA), the industry's first media-server virtualization product in the unified collaboration market. This product allows our customers' IT departments to load balance key network resources saving intervention and costly resources. This product has just begun shipping in March and is already proving to be a breakthrough product.

Finally, we launched the RMX 400 conferencing platform in late February. It is an architecture that provides the industry's first 1080p 30 frames per second bridging capability with unsurpassed port density and unparalleled capacity and scalability. As with DMA, this new product began shipping in March and is already getting great feedback from our channels and end-user customers.

Although early in its launch this best-of-industry network solution has already begun to contribute in Q1. Driving our network systems business at double digit, year-over-year growth in the quarter, we believe our leading architecture and comprehensive network solution will be a critical driver of growth in the video and Telepresence and should enable Polycom to make competitive gains in 2009.

Click here for access to the complete earning's transcript.

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