Market Transitions Create Strong Opportunities For Polycom

| About: Polycom, Inc. (PLCM)

Of all the companies I cover, Polycom (NASDAQ:PLCM) seems to be one of the more misunderstood organizations from an investor perspective. I think the primary reason for this is that the markets Polycom plays in are equally misunderstood, and if investors gave the company another look they would see strong value in PLCM's future.

The market that most would associate PLCM with is, of course, enterprise video conferencing, which many perceive to be flat or even declining, hence the hesitancy to invest in a company like PLCM. I also find that many investors have a negative bias towards enterprise video based on poor experiences in the past when roll around carts and confusing interfaces were the norm. Don't get me wrong; I understand where the bad history emanates from and the frustrating experiences that users have had. I'm a former IT professional myself and I can tell you from experience that those old systems took anywhere from 30 minutes to an hour to get going - hardly a spontaneous collaboration tool. However, the technology has come a long way over the past few years.

Back to the market question and whether video is actually growing or not. My research firm, ZK Research, recently ran a survey of almost 1000 companies that use video today to understand usage habits and buying patterns. The results of the survey were in stark contrast with much of the industry perception. 90% of respondents indicated that they were expecting to see increased video utilization over the next 12 months. So why does the ZK Research survey conflict with industry opinion? It's because video is in transition and the market is still being sized using legacy methods.

The box counting analyst firms still have market forecasts that measure only video hardware sales. I would agree that the market for video hardware is currently flat. However, customers are using and spending budgets on software solutions, cloud based video and consulting and professional services. In particular, upfront business planning services have been particularly hot as business managers and corporate executives are often making the decision for video today.

Over the past year, PLCM has completely revamped its products to be more in line with the shifts to software, cloud and mobile video. In addition, the company has been building a strong professional services organization, which includes the 2013 acquisition of Sentri. Last week I attended the company's channel conference, TEAM Polycom, in Vancouver and at the event PLCM hit its reseller base hard with the theme of service and industry transformation as it preps for the next wave of video growth. Make no mistake, the video industry is as healthy as ever and PLCM finally has the right products to take advantage of the current market trends. I actually think the momentum behind software and mobile video will eventually drive organizations back to beefing up their hardware platforms to make video a company wide resource. Video usage begets more video usage and the key is to understand where to deploy what type of video and this should drive growth across all segments of the technology.

Another theme I like for PLCM this year is the company's attachment to Microsoft (NASDAQ:MSFT) Lync. Over the past few years MSFT has been convincing customers to deploy Lync as a desktop collaboration tool, primarily for chat and presence. This past year, MSFT released the first version of Lync that could compete with the likes of Cisco (NASDAQ:CSCO) and Avaya in the area of enterprise voice. However, Lync alone can't fully replace an IP PBX, but Lync and a partner can and 75% of the time, when customers migrate to Lync voice, they choose PLCM as the partner. Additionally, PLCM has, by far, the best Lync video solutions. The typical journey for Lync customers is Lync desktop, followed by Lync voice and then Lync video. We're really at the early stages of Lync for voice and video, creating a Lync wave that PLCM should be able to ride for the next few years. PLCM certainly understands the opportunity here and has been aggressively pushing its Lync compatible solutions into a fast growing Lync install base.

Lastly, the VoIP related products have been growing impressively for PLCM of late. This past quarter, the UC personal devices segment grew 33% YoY with much of that revenue growth coming from VoIP phones. While the growth of traditional premises based VoIP solutions has slowed down, cloud UC providers have been red hot and consequently so have the growth of PLCM's line of new VVX IP phones. Small and mid size businesses will continue to migrate their telephony infrastructure to the cloud, creating another strong market trend for PLCM to attach itself to.

One final point, the recent hiring of Peter Leav to be the company's new CEO seems to be a great fit. PLCM has been aggressively rolling out new products and now it is time to shift the go to market strategy and help its channel evolve. In other words, now that the product transition is underway, its time to execute, something Mr. Leav has proven he can do given his previous successes at Motorola (NYSE:MSI) and NCR (NYSE:NCR).

I'm a big believer that significant market share shifts only happen during market transitions. The unified communications (UC) industry, which includes video, is currently going through several market transitions and PLCM appears to have the right set of products today, but more importantly, the right mindset to go after these opportunities.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: ZK Research maintains a relationship with PLCM and CSCO.

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