Yesterday, after market close, Polycom Inc. (PLCM) declared excellent fourth quarter 2010 financial results. Despite facing competitive pressure from Cisco System Inc. (CSCO), which acquired Tandberg TV, Polycom’s high-margin Network Systems businesses grew 25% year over year and 20% sequentially in the reported quarter.
Total revenue in the fourth quarter of 2010 reached a record high of $339.6 million, up 26.8% year over year and surpassing the Zacks Consensus Estimate of $328 million. The increase in revenue was primarily attributable to strong growth at both its voice and video communications businesses.
GAAP net income in the fourth quarter of 2010 was $33.1 million or 37 cents per share compared with a net income of $12.8 million or 15 cents per share in the prior-year quarter. However, adjusted (excluding special items) EPS in the reported quarter was 40 cents, significantly above the Zacks Consensus Estimate of 31 cents.
Geographic Distribution of Sales
In the fourth quarter of 2010, the American region generated approximately $181 million of revenue, up 26.6% year over year. Europe, Middle East and Africa generated $86 million, up 22.9% year over year. Asia-Pacific region accounted for the remaining $73 million, up 32.7% year over year.
Margins
Gross margin in the reported quarter was 59.8% compared with 57.2% in the year-ago quarter. Operating expenses in the quarter were $167.3 million compared with $133.8 million in the prior-year quarter. Operating margin was 10.5% compared with 7.2% in the year-ago quarter.
Balance Sheet
At the end fiscal 2010, Polycom had nearly $535.7 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 fiscal 2009.
During fiscal 2010, cash flow from operations was $143.4 million compared with $180.8 million in fiscal 2009. Free cash flow (cash flow from operation less capital expenditure) in fiscal 2010, was $74.1 million compared with $143 million in fiscal 2009.
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 andresulted in cut-throat pricing strategy. We thus maintain our long-term Neutral recommendation on Polycom. It is currently a short-term Zacks #3 Rank (Hold) on the stock.
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