Teleconferencing specialist Polycom (Nasdaq: PLCM) saw sales shoot up 28% year-over-year, to $295 million. Non-GAAP income also improved from $0.29 per share to $0.34 per share. All three of the company's segments saw solid growth, including a stellar 42% gain in the voice communications division. CEO Andy Miller gushed about record revenues and accelerated growth. What's not to like?
The stock has been trading down by as much as 11% based on that fine report.
Competitive pressure from Cisco Systems (Nasdaq: CSCO), which is now Polycom's only credible rival, would explain a great deal, but Polycom's management believes they stole market share from Cisco in the quarter. In fact, an expanded partnership with Hewlett-Packard (NYSE: HPQ) promises to extend the Polycom brand to markets and niches previously unavailable to the company. Microsoft (Nasdaq: MSFT) and IBM (NYSE: IBM) are also aboard the Polycom partner train, lending some weight to the company's "open platform" ambitions. So stiffer competition is not quite it.
And it isn't a sector effect. Cisco's stock is falling today, too, but so is everyone else's. Yet even on a markedly gloomy trading day in general, Polycom manages to have the worst fall of any billion-dollar stock. Doing your business in a hot sector like high-definition teleconferencing doesn't appear to help today.
So what's the culprit behind Polycom's sudden swan dive? The way I see it, two factors came together to stir the pot:
- Forward guidance got a slight bump, moving full-year sales estimates from "high teens" growth over 2009 to "lower twenties." While that's certainly an upgrade, Wall Street may have wanted more.
- The order backlog isn't keeping up with sales growth. Some of that is due to Polycom's shipping out orders in a timely fashion these days, but you also have to wonder if demand is dropping off. Either way, a lower order backlog is bad news for forward visibility into the business, and you know how Mr. Market feels about uncertainty.
Even so, Polycom's shares have beaten both Cisco and the S&P 500 index year-to-date and year-over- year. The balance sheet is solid and debt-free, and I see Cisco and Polycom sharing the spotlight in an increasingly important market for quality teleconferencing systems. You must put up with a steep price-to-earnings ratio to buy these shares, but strong cash flows tell a slightly better story about Polycom's fundamentals.
All in all, I see a market-beater in the making, especially given today's generous discount. So I'm heading over to CAPS to rate Polycom "outperform" over the next two to four years. Who's with me?
