Polycom Inc (PLCM, Financial), a video-conferencing company, posted first-quarter fiscal 2015 results last month with just 1% year-over-year revenue growth but a whopping 28% increase in non-GAAP earnings. Sounds like Polycom is struggling to grow top-line and increasing earnings through cost cutting and other initiatives, but there’s a limit to which this can work. Unless Polycom finds a way to bolster its top line, earnings will tend to stop growing, if not start declining.
Struggling on top-line growth
Product revenues moved up 1% year-over-year, but services revenue stayed flat. As a result, consolidated sales came in at $330.7 million, representing a growth of 1% year over year. A look at the last three years' revenue data clearly demonstrates that Polycom is struggling on top-line growth.
Apparently, Polycom is losing some probable business to its high-profile rival Cisco (CSCO, Financial). During earnings call Q&A session, Peter Leav, president and chief executive officer, said:
“And based upon results and various market share data, we believe we have lost some share in North America in the quarter. And that's something, as I just mentioned to Kent, we are working to fix.”
The Americas region, which represents 48% of company’s revenue, witnessed a 4% year-over-year decline. The EMEA region which represents 28% of sales grew 5% year over year. The APAC region, which represents 24% of sales, grew 4% year-over-year on the back of good performance in China and India.
Fixing the top-line problem
This isn’t going to happen in a quarter or two. If we look at the guided range for top-line growth in the second quarter, the company expects the same to be in the range of $329-$339 million versus $328-$338 million for the first quarter. So, no significant jump anticipated sequentially.
On product innovation side, Polycom unveiled RealPresence Group Series solutions that will transform small workspaces into high-powered collaboration hubs. According to Frost & Sullivan, the huddle rooms market is projected to reach into the tens of millions by 2020. This has created demand for high-quality voice, video and content collaboration solutions designed for these kinds of ad hoc meeting environments.
Also, Polycom expanded its relationship with Microsoft in March 2015, through a new series of video-conferencing solutions for Skype for business.
“Together, Microsoft and Polycom have a joint vision to deliver collaboration experiences that help our customers defy distance. We are now expanding our solutions to allow SMBs, as well as large enterprises, to reap the benefits of video collaboration,” said Peter Leav, Polycom President and CEO. “Our partnership with Microsoft has never been stronger, and over the years, it has fortified a market demand for collaboration experiences that help make our customers successful.”
Bottom line is growing
Despite the absence of significant top-line growth, earnings have been growing. Adjusted net income came in at $0.23 per share, registering year-over-year gains of 28% and beating analysts’ expectations by $0.02 per share. This was primarily driven by lower operating expenses which registered a 17.6% year-over-year decline and came in at $163.8 million. In addition, the company repurchased $40 million of common stock during the quarter.
For the second-quarter the company expects earnings to be in the range of $0.21 to $0.23 per share.
Wrapping up
Polycom is struggling to achieve meaningful top-line growth and bottom-line is being improved on increasing operational efficiencies. However, there’s a limit to which operational efficiencies can be improved and is certain to hit a roadblock if the top-line doesn’t grow. Its expanded partnership may help the company to bolster revenue growth, but this isn’t expected any time soon, as evident from the guided range for second quarter.
Next five years growth is pegged at CAGR of 15% and forward P/E of 13.21 does make the stock look attractive. However, the stock is trading in a narrow band and unless you have appetite for holding for long term, there are better technology stocks to bet your money on.
