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Yesterday, after market close, Polycom Inc. (PLCM - Analyst Report) declared its third quarter 2010 financial results. Total revenue of $308.1 million was up 26.8% year over year. This was also better than the Zacks Consensus Estimate of $302 million. The increase in revenue was primarily due to strong growth at both its voice and video communications businesses.

GAAP net income in the third quarter was $17.3 million or 20 cents per share compared with a net income of $14 million or 16 cents per share in the prior-year quarter. However, adjusted (excluding special items) EPS in the same quarter was 23 cents, a penny below the Zacks Consensus Estimate of 24 cents.

In after market trade, the share price of Polycom was up $.126 (4.29%) to $30.60.

Video Communications Product Line (including applicable Services Revenue)

Quarterly revenue was $160 million, up 23.1% year over year. This segment continues to generate the bulk (52%) of the quarterly revenue.

Voice Communications Solutions Product Line (including applicable Services Revenue)

Quarterly revenue was $102 million, up 30.8% year over year. This product line generated 33% of total revenue.

Network Systems Product Line (including applicable Services Revenue)

Quarterly revenue was $46 million, up 31.4% year over year. This segment generated 15% of total revenue.

Margins

Gross margin was 60.9% compared with 58.8% in the year-ago quarter. Operating expenses, in the same quarter, were $141.2 million compared with $106.9 million in the prior-year quarter. Operating margin was 15.1% compared with 14.8% in the year-ago quarter.

Balance Sheet

At the end of the third quarter 2010, Polycom had nearly $500.5 million of cash & investments and no outstanding debt on its balance sheet compared with $467.5 million of cash & investments and no outstanding debt at the end of the previous year.

Cash Flow

During the third quarter, cash flow from operations was $40.8 million compared with $39.4 million in the year-ago quarter. Free cash flow (cash flow from operation less capital expenditure) was $22.6 million compared with $30.5 million in the year-ago quarter.

Future Financial Outlook by Management

Polycom forecasted that its fourth quarter 2010 revenue would grow 5% to 7% sequentially. Full year 2010 revenue is expected to grow in the low 20s compared to the high teens growth forecasted in January, with operating margins of 14%-14.5%. Polycom continues to forecast operating margins to reach 20% in 2011.

Our Recommendation

Given the global economic downturn, business enterprises are restricting their travel budgets as a cost-control measure. This makes Polycom’s high-definition telepresence solutions a cost-induced alternative in an increasingly interactive world. However, we remain concerned about the fiercely competitive nature of the video conferencing industry.

Nevertheless, Polycom has a healthy financial position that may sustain its future ventures. We maintain our long-term Neutral recommendation for Polycom.  It is currently a short-term Zacks #3 Rank (Hold) stock.

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