Polycom Inc. (PLCM) declared excellent first quarter 2011 financial results. Despite facing a typical weak first quarter seasonality and competitive pressure from its larger rival Cisco System Inc. (CSCO), which acquired Tandberg TV, Polycom’s industry leading unified collaborative solutions have received huge market traction in the emerging markets of China and India.
Total revenue in the first quarter of 2011 was a record at $344.2 million, up 24.6% year over year and surpassing the Zacks Consensus Estimate of $337 million. The increase in revenue was primarily attributable to strong growth at both its 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 was 42 cents, significantly above the Zacks Consensus Estimate of 30 cents.
Geographic Distribution of Sales
In the first quarter of 2011, the American region generated approximately $176 million of revenue, up 17.3% year over year. Europe, Middle East and Africa generated $86 million, up 28.4% year over year. Asia Pacific region accounted for the remaining $82 million, up 39% year over year.
Margins
Gross margin in the reported quarter was 59.8% compared with 57.7% in the year-ago quarter. Operating expenses in the same quarter were $169.6 million compared with $144 million in the prior-year quarter. Operating margin was 10.5% compared with 5.6% in the year-ago quarter.
Balance Sheet
At the end of the first quarter of 2011, Polycom had nearly $538.7 million of cash & investments and no outstanding debt on its balance sheet compared with $535.7 million of cash & investments and no outstanding debt at the end of fiscal 2010.
Cash Flow
During the first quarter of 2011, cash flow from operations was $45.9 million compared with $20.7 million in the year-ago quarter. Free cash flow (cash flow from operation less capital expenditure) in the reported quarter was $30.7 million compared with $3.7 million in the year-ago quarter.
Outlook
Management declared that its second quarter 2011 revenue will increase sequentially.
Our Recommendation
As of now, Polycom remains the only pure play unified collaborative solutions provider. The company stands to gain as enterprises, governments and educational institutions increasingly recognize the productivity-enhancing benefits of video conferencing.
On the other hand, the uniform collaborative communications market is fiercely competitive, resulting in cut-throat pricing. We thus maintain our long-term Neutral recommendation on Polycom. Currently, it holds a short-term Zacks #3 Rank (Hold) on the stock.
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