Polycom Reports Mixed Results

We downgrade our recommendation for Polycom Inc (PLCM - Analyst Report) to Neutral, following the mixed financial results of its third quarter 2009. Third quarter total revenue of $243 million was down 11.9% year-over-year but was an improvement of 5.3% sequentially. Quarterly revenue was also an improvement of 3% over the Zacks Consensus Estimate. 

The decline in year-over-year revenue is the result of weak demand for both Video and Voice Communication products whereas sequential improvement was primarily due to higher sales of Video Solutions products, particularly the high-margin Network System products. On a GAAP basis, net earnings in the third quarter were $13.7 million or 16 cents per share compared to a net income of $17.9 million (21 cents per share) in the prior-year quarter and a net Income of $15.3 million (18 cents per share) in the previous quarter. 

However, adjusted net income (excluding special items) in the reported quarter was $21.1 million or 24 cents per share, below the Zacks Consensus Estimate of 25 cents. Quarterly gross margin was 58.8% compared to 60.2% in the year-ago quarter and 58.6% in the previous quarter. Operating expenses, in the same quarter, were $120.2 million compared to $138.3 million in the prior-year quarter and $109.2 million in the previous quarter. 

This reflects the aggressive cost cutting measures taken by management during the past one year. At the end of the third quarter, Polycom had nearly $408 million of cash & marketable securities on its balance sheet compared to $287.5 million at the end of the prior-year quarter and $375.5 million at the end of the previous quarter. 

The company generated around $39.4 million cash from operation during the reported quarter compared to $40.4 million in the prior-year quarter and $46.8 million in the previous quarter. During the third quarter, the company achieved its 47th quarter of sequential positive cash flow from operations. 

Quarterly free cash flow (cash flow from operation less capital expenditure) was $30.5 million compared to $24.2 million in the year-ago quarter and $38.25 million in the previous quarter. Video Solutions Product Line (including applicable Services Revenue) Quarterly revenue was $130 million, down 9.7% year-over-year but up 1% sequentially. This segment continues to generate the bulk (53.5%) of quarterly revenue. 

Voice Communications Solutions Product Line (including applicable Services Revenue) Quarterly revenue was $78 million, down 20.4% year-over-year but was up 13% sequentially. This product line generated 32.1% of total revenue. Network Systems Product Line (including applicable Services Revenue) Quarterly revenue was $35 million, up 3% year-over-year and also up 6.1% sequentially. This segment generated 14.4% of total revenue. 

Management has given guidance that its fourth quarter 2009 revenue will grow by 4% to 6% sequentially. Gross margin is expected to remain at 59.5%.

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