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Polycom An Acquisition Target?

Posted on Thursday, Apr 16th 2009

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.
 
Chart for Polycom, Inc. (PLCM)

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Assuming Logitech ends the year with $250 million in free cash flow, with a EV/FCF of 6.44, wouldn’t Logitech prove to be a better acquisition candidate when compared to Polycom’s EV/FCF of 9.16?

I agree with you that Polycom could be a better fit based on Cisco’s current line of videoconferencing products.

Asif Thursday, April 16, 2009 at 11:09 AM PT

Why would Cisco want Logitech? There is no synergy. Companies don’t acquire others based on which is cheaper. They acquire to further a specific strategic objective.

Sramana Mitra Thursday, April 16, 2009 at 12:32 PM PT

I don’t think people saw a lot of synergies when Cisco acquired Pure Digital either. Logitech makes the best selling web cams. A fit with WebEx?

It also makes video security systems and network music players.

Asif Thursday, April 16, 2009 at 1:31 PM PT

Have either of these companies (CISCO /HP) expressed an interest in acquisitions with the economic conditions being what they are right now? Shareholders may not be too receptive right now to dropping a billion or two at this time.

Krishna Friday, April 17, 2009 at 3:52 AM PT

If Cisco bought Polycom that would give Cisco more of a presence in the SMB…where Cisco has been trying to get a foothold in for some time.

They thought Linksys was the answer, but they are still more consumer/small business focused.

Additionally, Polycom and Cisco already work very closely in the voice side of things. Polycom is the OEM for Cisco’s conferencing phones.

I imagine they also provide other technology. Would be a huge win for Polycom.

Garrett Smith Friday, April 17, 2009 at 7:42 AM PT
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