Competitive and macro-economic pressures led to video-conferencing gear vendor Polycom Inc. (PLCM) disappointing Wall Street. However, after a 50% drop in the last three months, do the fundamentals support a buy at these levels? And how does the stock compare to its peers in the videoconferencing space? This article is aimed at answering these and other questions, and evaluates if the impending bounce in the coming days and weeks will be one to buy, or if it is a dead-cat bounce that should be sold.
PLCM reported that in the September quarter, both revenue and earnings growth decelerated for this high-flier that had risen a torrid six-fold to its peak in July at $34.30 from the crisis lows in 2008-09. Furthermore, it also missed analyst estimates for both revenue ($379 million versus $389 million) and earnings (26c versus 27c). The company blamed the miss on a slowdown in enterprise spending related to the weak US economy that pushed a few key transactions into the December quarter due to the lengthened sales cycle.
Furthermore, it lowered its guidance for operating margins from 20%-22% to a range of 18%-20% due to investments it needs to make in its partnerships with International Business Machines (IBM), Hewlett Packard (HPQ) and Microsoft Corp. (MSFT), and in the mobile and social media spaces. A bunch of analysts (including Pipar Jaffray, William Blair, Morgan Keegan, Stifel Nicolaus, and others), however, weighed in and expressed skepticism that PLCM would even meet its sales goals (besides margin goals) due to both the macro-economic issues that the company cited, as well as competitive issues. They lowered ratings on PLCM across the board, and also lowered the price target to the low-to-mid-$20s from the above $30 range prior to the quarter report.
During the conference call, the company defended its competitive strength against its chief rival Cisco Systems Inc. (CSCO), insisting that while the current quarter was a disappointment, it doesn't look at market share on a quarterly basis. The company cited that in the last half of 2010, it gained 8 points of market share against CSCO, and in the first quarter of 2011, it gained 5 points in market share.
Cisco became PLCM’s main competitor after it purchased Tandberg, a global leader in uniform collaborative communications (UCC), and merged it into its own high-end videoconferencing division. The company also indicated that in the case of Chinese telecom equipment vendor Huawei, although it has a presence in international markets, the PLCM product is far superior and more competitive.
Overall, the videoconferencing sector has excellent long-term fundamentals, as you have cost-savings drivers, on the one hand, that propel corporations to shift meetings to online in a tough economy, and then you also have revenue-enhancement drivers. Furthermore, the continuing pace of globalization is also a strong driver, and so is the proliferation of online learning and remote medical care. Gartner has projected that the videoconferencing market is expected to grow rapidly at 18% between 2008 and 2013.
PLCM is one of the only pure play publicly traded companies in video-conferencing, with a 45% market share in terms of video endpoint shipments as reported in August. After Thursday’s fall, PLCM now trades at a cheap forward P/E of 11-12, while earnings are projected to increase at a 37% annual growth rate from 75c in 2010 to $1.39 in 2012. Furthermore, it also trades at a price-to-book (P/B) ratio of 1.09. This is very reasonable, and a discount compared to its peers in the videoconferencing industry, as detailed below:
CSCO is the worldwide leader in the manufacturing of IP-based networking and other products related to the communications and IT industry worldwide. It became PLCM’s primary competitor after it purchased Tandberg, and merged it into its own high-end videoconferencing division. CSCO trades at a forward 9 P/E, while earnings are projected to grow at a 5% annual compound rate from $1.62 in the 2011 to $1.88 in 2013; and it trades at a P/B ratio of 2.0.
Adobe Systems Inc. (ADBE) provides design, imaging and publishing software for print, web, mobile and dynamic media production. Its Adobe Connect™ product offers a complete webinar solution for web meetings, eLearning and webinars for the enterprise market. It trades at a forward 10 P/E, while earnings are projected to grow at a 15% annual compound rate from $1.93 in 2010 to $2.54 in 2012; and it trades at a P/B ratio of 2.4.
Logitech International SA (LOGI), a Swiss manufacturer of mostly computer peripheral products, entered the videoconferencing market with the purchase of LifeSize Communication Inc., and recently added Milan, Italy-based videoconferencing solutions provider Mirial to its portfolio. LOGI trades at a forward 12 P/E, while earnings are projected to fall from 87c in the 2011 to 72c in 2013; and it trades at a P/B ratio of 1.2.
Citrix Systems Inc. (CTXS) develops online application virtualization, networking and performance management software. Its videoconferencing solutions include the GoToMeeting, GoToWebinar, GoToTraining, GoToAssist and GoToManage series of products for the desktop environment. CTXS trades at a forward 22 P/E, while earnings are projected to grow at an 18% annual compound rate from $1.98 in 2010 to $2.76 in 2012; and it trades at a P/B ratio of 4.4.
IBM is the worldwide leader in technology services. Its IBM Sametime software delivers unified, real-time communication and collaboration services, from enterprise instant messaging and online meetings to telephony and video conferencing. IBM trades at a forward 12 P/E, while earnings are projected to grow at a 13% annual compound rate from $11.59 in 2010 to $14.78 in 2012; and it trades at a P/B ratio of 9.7.
Onstream Media Corp (ONSM) is a provider of webcasting, web-conferencing, digital asset management, network and web publishing services. It generates losses right now, and it trades at a P/B ratio of 0.4.
Clearone Communications (CLRO) is a global provider of premium audio and video conferencing solutions for enhancing collaboration, presentation, distance communications, and multimedia applications. It trades at a current 16 P/E, while earnings have been flattish; and it trades at a P/B ratio of 1.2.
Radvision Ltd (RVSN) is an Israeli provider of products for video conferencing, video telephony, and development of unified communications systems. It generates losses right now, and it trades at P/B ratio of 0.8.
Furthermore, PLCM is leveraging its strength in the enterprise market, and extending it to developing videoconferencing solutions for the desktop and for smartphones. It is working with leading mobile device vendors Apple Inc. (AAPL), Motorola (MSI) and Samsung in developing solutions for the mobile handset space. It also has strong business agreements with Hewlett-Packard Co., from who it acquired the Halo Visual Collaboration business in June.
As part of that deal, PLCM struck an agreement with HPQ to be its exclusive partner for telepresence and certain video unified communications solutions for both internal HP deployments and for resale. Besides HPQ, PLCM also has strong business agreements with other vendors in the telecommunications industry, including telecom services providers Verizon Communications (VZ) and AT & T Inc. (T) in the U.S.; and with Telefonica SA (TEF) for sales in Spain, the rest of Europe and in Latin America.
In the social media space, PLCM recently announced the acquisition of ViVu, which gives it a fast track to embed video-enabled collaboration software into a wide range of web applications in social platforms. Furthermore, recently PLCM also announced a new partnership with social business platform Jive Software to integrate PLCM’s HD video into Jive’s business platform. Also, in March, PLCM acquired Accordent Technologies, a leading provider of video content management and delivery solutions, for $50 million in cash, increases PLCM’s market opportunity by $500 million.
PLCM, despite the slight miss in the current quarter, is still posting healthy margins and generates consistent cash flow, and it also has a strong balance sheet and long-term operating performance record of rising revenues and earnings every year. It has a leading market share in the enterprise videoconferencing space, and is working on leveraging that strength into the mobile and social media spaces.
After the fall Thursday, it is also trading at a discount to both its growth as well as to its peers in the videoconferencing space. We believe that it is a good value buy for the long-term investor, and would look to buy it here in stages to take advantage of any further weakness in the stock.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.