Earnings Preview: Polycom, Inc.

Polycom, Inc.(PLCM), a leading provider of video and audio conferencing equipment and related network infrastructure, is slated to release its second quarter 2011 results on Thursday, July 21, after the closing bell. The current Zacks Consensus Estimate for the second quarter is pegged at 20 cents per share, representing an annualized growth of 126.39%.

With respect to earnings surprises over the trailing four quarters, Polycom has outperformed the Zacks Consensus Estimate in all the three quarters barring the one quarter, where the reported EPS missed the Zacks Consensus Estimate by a penny. The average earnings surprise was positive 13.89%, implying that the company has outdone the Zacks Consensus Estimate by the same magnitude over three of the trailing four quarters.

First Quarter Recap

On April 21, 2011, Polycom reported its first quarter 2011 financial results. The company recorded the highest revenues in its history during the first quarter of 2011. Total revenue in the reported quarter was $344.2 million, up 24.6% year over year and exceeded the Zacks Consensus Estimate of $337 million. The increase in revenue was primarily attributable to strong growth of the company’s voice and video communications businesses.

GAAP net income in the first quarter of 2011 was $34 million or 38 cents per share compared with a net income of $5.4 million or 6 cents per share in the prior-year quarter. However, adjusted (excluding special items) EPS in the reported quarter stood at 37 cents, significantly above the Zacks Consensus Estimate of 30 cents.

Agreement of Estimate Revisions

In the last 30 days, 2 out of the 8 analysts covering the stock increased their EPS estimates for the second quarter of 2011 while 2 analysts decreased their estimates. Similarly, for the third quarter of 2011, out of the 8 analysts covering the stock, 3 analysts raised their EPS estimates while 2 analysts reduced the same.

For fiscal 2011, in the last 30 days, out of the 8 analysts covering the stock, 1 analyst increased the EPS estimate while 3 analysts moved downward. Likewise, for fiscal 2012, out of the 7 analysts covering the stock, 1 analyst revised the EPS estimate upward while 2 analysts moved in the opposite direction.

Magnitude of Estimate Revisions

During the last 30 days, for the second and third quarter of 2011, the current estimates were in line with the Zacks Consensus Estimates of 20 and 23 cents, respectively. Similarly, for fiscal 2011 and 2012 the current estimates remained flat with the Zacks Consensus Estimates of 90 cents and $1.21, respectively.

Earnings Surprises

In the previous quarter, Polycom reported EPS of 19 cents, which was 4 cents above the Zacks Consensus Estimate 15 cents per share. The second quarter of 2011 contains an earnings surprise of 5.00% while the next quarter reflects an earnings surprise of 0.00% (essentially a proxy for future earnings surprises). Similarly, fiscal 2011 contains a negative earnings surprise of 10.00% while 2012 has an upside potential of 1.65%.

Our Recommendation

We believe the long-term fundamentals of the video conferencing industry remain compelling. The global economy has just started recovering and business enterprises are restricting their respective travel budgets owing to their cost-control measure. This makes Polycom’s HD telepresence solutions a cost-induced alternative in an increasingly interactive world.

However, we believe that uniform collaborative communications market is highly competitive that resulted in fierce price wars. Cisco Systems, Inc. (CSCO) became the main competitor of Polycom after it purchased Tandberg TV of Norway. Tandberg is the undisputed global leader in the uniform collaborative communications market with around 40% market share. Moreover, Polycom’s stock soared 155% over the last one year, which will likely be another concern for the investors.

We, thus, maintain our long-term Neutral recommendation for Polycom, Inc. Currently, Polycom, Inc has a Zacks#3 Rank, implying a short-term Hold rating on the stock.

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