Polycom Hits Rough Weather

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Polycom (NAS: PLCM) , a video conferencing communication solutions provider, reported a 23% increase in third-quarter revenue to $379 million from the year-ago period on Oct. 19. However, both the top- and bottom-line numbers of the company were below analyst expectations. Unimpressed by the company's performance, Wall Street gave its stock a hammering by almost 29% in premarket trade the next day. Let's take a closer look at the numbers to see what happened.

The numbers
Its aggressive strategy of pushing sales in emerging markets was effective. Emerging markets such as India, China, Russia, the Middle East, Africa, and Latin America grew by a considerable 58% compared with the same quarter last year. Besides these markets, Polycom is also aiming at improving its business in Central Europe, especially in Germany.

Quarterly revenue in the Americas grew 15%; Europe, Middle East, and Africa grew 23%; and the Asia-Pacific region grew a significant 41%.

On the margins front, gross margins remained relatively flat at 58%. Selling general and administration margins moved a tad lower to 35.7% from 37.9%.

Taking video conferencing to the next level
In July, Polycom acquired Hewlett-Packard's visual collaboration business for $89 million. The business offers high-definition immersive telepresence -- a service already performing ahead of plan for the company. Polycom would manage these services in partnership with firms like AT&T, Verizon, and BT

Polycom also launched a software platform called RealPresence. This platform can interoperate among a variety of devices and other platforms. To make this possible, the company has formed an open collaboration network comprising partners such as Microsoft, IBM, HP, Broadsoft, and Juniper. The third quarter saw approximately 26% of revenues being generated from the open collaboration network alone.

In October, Polycom took its RealPresence platform up another notch after introducing RealPresence Mobile -- an enterprise video software solution for Apple's iPad and Motorola Mobility (NYS: MMI) and Samsung tablets.

The company hopes that this open collaboration of partners would rapidly expand to form a majority of Polycom's revenues soon. If Polycom is successful, this would be great because of the proliferation of smartphones such as the vastly popular iPhone and Google's Android smartphones and tablets that would be able to run this platform.

So why all the disappointment?
Analysts by and large have been disappointed with Polycom's outlook. The management's guidance for Q4 in terms of quarter-over-quarter revenue growth stands at 5%-6%, much lower than the street's expectation of 10%.  

Polycom CEO Andrew Miller said there are two factors behind the less-than-anticipated revenues. One, that it revealed signs of a slowdown in the economy and consequently in sales. Two, that the company still had headroom for improvement in terms of sales execution.

However, Polycom's woes have more to do with lower corporate spending and cutthroat competition in the video conferencing space.

The company faces stiff rivalry from firms such as Cisco (NAS: CSCO) and Logitech (NAS: LOGI) . Cisco recently announced that it's acquiring BNI Video. Logitech has also moved in with its acquisition of Italian firm Mirial to augment its enterprise class video conferencing services that would even support the latest iPhone 4S. So all of this and more have given Polycom a run for its money.

The Foolish bottom line
Although the lower-than-expected numbers were partly due to poor execution, this can be fixed. What is more worrying is the heated competition and macroeconomic factors that have hit corporate IT spending. For these reasons, I would stay cautious on Polycom for now.

At the time this article was published Keki Fatakia does not own shares in any of the companies mentioned in this article. The Motley Fool owns shares of Cisco Systems, Apple, International Business Machines, Logitech International, Google, and Microsoft. Motley Fool newsletter services have recommended buying shares of Polycom, Logitech International, Cisco Systems, Google, Microsoft, Apple, and AT&T. Motley Fool newsletter services have recommended creating a bull call spread position in Microsoft. Motley Fool newsletter services have recommended creating a write covered call position in Logitech International. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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