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Video Conferencing A Major Opportunity For Networking Players

Posted on Wednesday, Aug 5th 2009

Recently, online video beneficiaries Juniper and Polycom reported better-than-expected results as the market stabilized. However, Akamai reported a disappointing quarter due to the delayed impact of the economic downturn.

On July 23, Juniper Networks (NASAQ:JNPR) reported a strong second quarter that beat estimates. Q2 revenue was down 11% y-o-y and 3% q-o-q to $786.4 million. Net income was $14.8 million, or $0.03 per share compared with net loss of $4.5 million or $0.01 per share last quarter. Adjusted earnings were $0.19 per share, beating analyst estimates of $0.18 per share on revenue of $767 million. Q1 analysis is available here.

Gross margin was 64.3%, down 330 basis points y-o-y, mainly due to product mix and a difficult pricing environment. Operating margin decreased to 12.2% from 18.3% last year. Operating expenses decreased $13 million, primarily due to previously announced mandatory shutdowns, the timing of new prototype build, lower employee benefits expenses benefits, and other expense controls.

During the quarter Juniper repurchased shares worth approximately $50 million. It generated net cash from operations of $148.7 million and ended the quarter with nearly $2.4 billion in cash, up by $91 million.

By segment, Infrastructure or IPG revenue was down 13% to $584 million and Service Layer Technologies (SLT) revenue was down 2% to $202 million.

Juniper recently expanded its reseller agreement with IBMfor Juniper EX and MX switches and routers. Juniper’s Stratus Project will also be collaborating with IBM’s 10 worldwide Cloud Labs. IBM expanded its reseller agreements with Cisco and Brocade, putting to rest speculation that it is pursuing an anti-Cisco strategy following its entry into the data center market.

 Juniper sees growth opportunities in the enterprise segment, which accounts for about 35% of its revenue. Though IT spending was constrained in the enterprise market, the company’s enterprise revenue grew 12% q-o-q. Juniper is a leader in high performance networking, and this has allowed it to move easily into the adjacent market of enterprise switches with the recent expansion of the EX line of Ethernet switches that the company unveiled early in the year.

Even though the market has been stabilizing, Juniper provided a weak outlook due to limited visibility. It expects Q3 revenue in the range of $717 million to $805 million and EPS of $0.19 to $0.21. Analysts were expecting revenue of $789.5 million and EPS of $0.19. The stock is currently trading around $26 after hitting a 52-week high of $26.97 on July 24. Market cap is about $14 billion and annual revenue is $3.57 billion.

Chart for Juniper Networks, Inc. (JNPR)

On July 29, Internet bandwidth optimizer Akamai (NASDAQ:AKAM) reported second quarter results that missed estimates due to aggressive pricing and the delayed impact of the recession.

Q2 revenue was up 5% y-o-y and down 3% q-o-q to $204.6 million. Net income was $36.0 million, or $0.19 per share versus $34.3 million last year. Adjusted net income was $75.3 million, or $0.40 per share. Analysts were expecting earnings of $0.41 per share on revenue of $211 million. My interview with Tom Leighton, co-founder of Akamai, is available here.

Gross margin was 71%, consistent with last quarterand down one percentage point from last year. Cash from operations was $105 million and Akamai ended the quarter with $927 million in cash. Akamai bought back shares worth $15 million during the quarter.

Akamai’s long-term customers increased 9% to 2,979. Churn was worrisome at over 5%, compared to 3% to 4% in most of 2008. ARPU was $22,800 for the quarter, down 4%.

Revenue from the company’s media and entertainment vertical declined 4% y-o-y and 8% q-o-q, driven by aggressive pricing. The e-commerce vertical grew 25% y-o-y and 2% q-o-q, driven by the traction of offerings such as application performance solutions and dynamic site solutions.

For the third quarter, Akamai expects revenue to be in the range of $195 to $203 million EPS between $0.33 and $0.36. The company did not provide a full year outlook as it was uncertain about the fourth quarter. Following its uncertain outlook and aggressive pricing strategy that has made its prices also uncertain, four analysts downgraded the stock from Buy.

The web acceleration market has matured over the past few years, with growing competition that has forced Akamai to take an aggressive stand on pricing. Akamai might not be enjoying the phenomenal growth rates it had about two years ago but it is still well positioned in the market.

Over the next few years, explosive growth is expected in online video via PCs, TVs and smart phones. With its massively distributed architecture with servers deep inside Edge ISPs, CEO Paul Sagan said Akamai is positioned to deliver video at enormous scales and quality. Akamai should also look at providing solutions for the booming video conferencing market.

The stock is currently trading around $16 after it hit a 52-week high of $23.58 on May 6. Market cap is about $3 billion and annual revenue is $790.9 million.

Chart for Akamai Technologies Inc. (AKAM)

Video conferencing player Polycom (NASDAQ:PLCM) with annual revenue of $1.1 billion, reported a better-than-expected second quarter on July 15. Q1 analysis is available hereand my interview with Polycom CEO Robert Hagerty is available here.

Q2 revenue was down 15% to $230.7 million. Net income was $15.3 million or $0.18 per share, down from $17.8 million or $0.20 per share last year. Adjusted earnings were $0.29 per share versus analyst estimates of $0.28 per share on revenue of $223.2 million.

By segment, video solutions revenue was $161.7 million, down 4% y-o-y and up 3% q-o-q. Voice communications revenue was $69.0 million, down 33% y-o-y and consistent with last quarter. Within video solutions, video communications revenue was $128.7 million, down 8% y-o-y and up 3% q-o-q. Network systems revenue was $33 million, up 18% y-o-y and 3% q-o-q.

Polycom generated $46.8 million in positive operating cash flow and ended the quarter with $375.5 million in cash and investments and no debt.

The videoconferencing market has benefited from the slowdown in the economy; it has grown 30% over last year as more businesses are cutting travel expenses and opting for videoconferencing. Polycom recently named Andrew Miller, former Tandberg CEO and Cisco executive, as executive vice president of global field operations, to help lead the company’s battle with Cisco and Tandberg for dominance in video conferencing.

In May, Polycom bagged a $45 million deal with Regus after the latter’s deal with Cisco fell through. Regus was one of Cisco’s first customers after it launched TelePresence in 2007. However, the TelePresence systems were never set up due to difficulties in implementation. Cisco’s TelePresence systems have more strict deployment requirements than other vendors. Interoperability is another issue with Cisco systems. Polycom systems can interoperate with all other platforms except TelePresence and Hewlett-Packard’s Halo. Polycom uses the H.323 video standard that many other videoconferencing systems also use.

For the third quarter, Polycom expects flat to 3% q-o-q growth in revenue. It expects to continue to gain market share in the second half. The stock is currently trading around $24 after hitting a 52-week high of $24.60 on July 22. Market cap is about $2 billion and annual revenue is $1.1 billion.

Chart for Polycom, Inc. (PLCM)=

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