Polycom has expanded their product line, distribution network and improved their execution in the last two years. The major growth drivers are now unified communications and telepresence solutions. Operationally the compa-ny is back on track and poised for a solid 2012. Our IV suggests a $23 share value. More strategically it’s not yet evident that Polycom is preparing to exploit the broader opportunities available in enterprise collaboration. If they do there is a multi-fold increase in their potential market and upside to our IV.
+ Polycom acquired the HP “Halo” telepresence business for $89M in 3Q 2011 and at the same time be-came the preferred solution for HP customers looking for visual collaboration and unified communications. Given the size and scale of HP this was a very good deal for PLCM shareholders.
+ Microsoft’s acquisition of Skype, combined with their own plans to offer more unified communication is another positive force for Polycom who is a Microsoft “Lync” partner and has solutions that leverage the Microsoft offerings. It’s too early to know how the Microsoft Skype/Lync strategy will come together and how well it will work but it does expand the potential opportunity for PLCM in the web-based segment.
+ Management is solid with the current CEO, Andrew Miller, joining the company in 2009 and becoming CEO in 2010. Miller brings a sales focus and has taken the company into a more direct and “high touch” sales model, especially for large accounts. This enables them to compete more effectively with Cisco in high value geographies and supplements their existing channel strategy. Miller has upgraded the manage-ment team with new senior sales executives to implement the program.
+ Despite fits and starts we believe the market for unified communications and enterprise collaboration re-mains large and solidly growing at 10-15% per year. Video and telepresence solutions are the most controversial but this is due more to a lack of vision and product maturity than lack of demand.
+ After a disappointing Q3 the company bounced back with solid Q4 results and confident guidance for a solid Q1 2012. This has stabilized the share price and restored a respectable level of investor confidence.
+ Mobile and better video capabilities are expanding the market for Polycom. Video chat and social net-working pave the way for more rich communication demands. They acquired some technology in this space (ViVu) that positions well with respect to tablets and smart phones.
= Stock-based compensation is a large element of the company cost structure for 2011 this figure was $60M out of $719M in total operating costs. (We included stock-based compensation costs in our IV models since they are a real cost to shareholders.)
= Due to the stock compensation the reported earnings numbers have a wide gap. For example GAAP earn-ings projected for 2012 are $0.95 while “normalized” EPS is expected to be $1.34 or 41% higher.
– Although they have evolved from an “audio conferencing company” to something more with unified communications and video-based solutions, the company remains too narrowly defined. If they em-braced the much large opportunity of being a collaboration company focused on “Enterprise 2.0” they would really be onto something major. As it stands it’s not on any drawing board that we have seen.
– Management has improved but is still in transition. The company has a mediocre reputation and indis-tinct corporate culture that adds to employee turnover and recruiting costs.
– Low cost and free offerings continue to improve putting pressure on price and making it harder to cross the line from “free” to “fee” for business users. It’s a line that many need to cross but it’s not easy.
– Interoperability is still a major problem. There are some efforts underway to provide more standards and seamless interfaces but today most of these systems don’t work together.
To access the note continuing the above points and our IV analysis please view the PDF report.