Polycom Takes a Bitter Pill Early

To keep your marriage brimming
With love in the loving cup,
Whenever you're wrong, admit it;
Whenever you're right, shut up.

-- "A Word to Husbands" by Ogden Nash, 1964

Telepresence, voice, and video conference expert Polycom (Nasdaq: PLCM  ) is taking the advice from my National Poetry Month tribute today. The company wasn't due to report first-quarter results until April 18, but jumped the gun when the numbers turned out softer than expected. That's a dramatic change of pace from January's analyst-crushing earnings report.

It's like what I tell my kids sometimes: Fess up to your mistakes now to avoid a bigger punishment later. Investors wouldn't appreciate Polycom sweeping this bad news under the rug just because there was a procedure to follow.

Oh, but the market reaction smarts anyhow. Polycom shares plunged as much as 21% overnight as management slashed its revenue guidance for the just-completed quarter by 8%. The company didn't offer earnings guidance alongside the last earnings report, but a fresh target of about $0.22 per share (adjusted) falls far short of the $0.30 Wall Street consensus.

These numbers are not only below expectations, but also less than required to keep the company operating on a healthy level. "Polycom's current operating model assumes a higher level of revenue growth, and we will analyze our assumptions between now and our regularly scheduled call on April 18th," said CEO Andy Miller. In other words, Polycom's operating model is broken at the moment, please check back later to see how we plan to fix it. The recently promised turnaround of American sales clearly isn't working out as planned.

The weakness was particularly bad in the Asia-Pacific and North America regions. Some analysts figure that Polycom's troubles stem from Cisco Systems (Nasdaq: CSCO  ) stepping up its sales efforts in unified communications, but many investors aren't buying that explanation. Cisco shares are down today, too -- not rising, as they would if Polycom had shown incontrovertible evidence of losing market share to its biggest rival.

As if to underscore the theory of soft digital communications markets, rather than a shift in relative sales, sector neighbors Cbeyond (Nasdaq: CBEY  ) and 8x8 (Nasdaq: EGHT  ) are also getting haircuts today, though more of a cleanup snip than a high and tight near-decapitation like Polycom's. The wisdom of the crowds often speaks volumes about specific market sectors, and this reaction points to a mild pullback in sales across this particular industry. Polycom looks like a coughing canary in the unified communications coal mine, and the other birds could very well catch that cough when their numbers come in.

Polycom is a longtime favorite of David Gardner's Rule Breakers team, but David is much more excited about stocks from a totally different sector these days.

Fool contributor Anders Bylund holds no position in any of the companies mentioned. Check out Anders' holdings and bio, or follow him on Twitter and Google+. The Motley Fool owns shares of Cisco Systems. Motley Fool newsletter services have recommended buying shares of Polycom. The Motley Fool has a disclosure policy.

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