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We reaffirm our Neutral recommendation on Polycom Inc. (PLCM - Analyst Report) following the mixed financial results of its third quarter of 2012. The unified collaborative solutions market, especially the corporate video conferencing segment, is becoming immensely competitive day by day. The global macro-economy is growing at a very slow pace, resulting in uneven tech spending. Further, Polycom currently is in the midst of its transition from hardware-centric to cloud- and software-centric business model, which is the main reason behind its sales execution problems.

Polycom has lowered its previously given financial outlook for the ensuing fourth quarter. Meanwhile, Polycom has decided to sell its enterprise handset business, which we believe will be fruitful in the long term as the company is slowly disinvesting its non-core hardware businesses. We believe Polycom is currently fairly valued as the stock price plummeted nearly 54% in the last year.

The business model of Polycom is gradually becoming software centric, while significantly raising its market opportunity. Cloud software solutions for telecom service providers, application software for mobile devices, and collaboration software for enterprises customers are the core focus areas of the company. Polycom is streamlining its cost structure by reducing headcounts in order to realign and reinvest resources in strategic growth areas.

Polycom has expanded its video conferencing technology agreement with Microsoft Corp. (MSFT - Analyst Report), primarily targeting the enterprise unified collaboration market.  The company is one of the most vital business partners of Microsoft and provides hardware for Microsoft’s video chat and VoIP software, Lync, which can be used to replace traditional phone systems.We believe the massive success of Lync has also helped Polycom to expand its top line in the previous quarter. 

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