The unified collaborative communications (popularly known as video conferencing) market is going through consolidation phase. Polycom Inc. (PLCM) remains the only pure play video conferencing solutions provider which is yet to collaborate with another company. The company will declare its first quarter 2010 financial results on Apr 21 after the closing bell.
Video conferencing market becomes highly competitive after Cisco System Inc’s (CSCO) acquisition of Tandbarg and Logitech International SA’s (LOGI) purchase of privately held LifeSize Communications Inc.
Strong Market Demand
As a result of the severe economic downturn, business enterprises on a global basis are restricting travel budgets as cost control measure. This makes Polycom’s high-definition telepresence solutions a cost-induced alternative in an increasingly interactive world. The company is a leading solutions provider for video conferencing, with an estimated 35% share of the market. Video product line has achieved sequential growth and the high margin Network Systems business continues to grow year over year.
Estimate Revisions Trend
The overall trend in estimate revisions is quite favorable. Over the last 30 days, 2 of 9 analysts covering the stock raised their earnings estimates for both the first quarter and full fiscal 2010. No analyst made any downward revision during this period.
Currently the Zacks Consensus Estimate for the first quarter 2010 earnings is 18 cents per share, which would be a substantial improvement of 37.6% over the prior-year quarter. Similarly, the current Zacks Consensus Estimate of $1 per share for full fiscal 2010 earnings also indicates a massive improvement of 28.4% year over year.
Polycom has a disappointing track record with respect to earnings surprises. Average surprise for the last four quarters was a negative 26.3%, which means that it has missed the Zacks Consensus Estimate by that measure, on an average, over the last year.
Nevertheless, the current Zacks Consensus Estimate for the first quarter 2010 indicates a 5.6% upside potential (essentially a proxy for future earnings surprises). However, the full fiscal 2010 earnings estimate again indicates a 1% downward potential.
Our Recommendation
We believe demand for Polycom’s unified collaborative conferencing products will continue to increase in the near future as a result of several positive industry trends. The company has been able to maintain healthy profit margins and a strong balance sheet with consistent free cash flow growth year after year.
At the same time, this is also our view that these positives are already reflected in the current valuation leaving little room for above market gain. We thus maintain our Neutral recommendation.
Read the full analyst report on “PLCM”
Read the full analyst report on “CSCO”
Read the full analyst report on “LOGI”
Zacks Investment Research
