It's hard to know how the market will respond to the latest set of earnings from video-conferencing specialist Polycom (PLCM). Simply looking at the headline numbers isn't the best way to look at its fourth-quarter earnings, so let's dig into the details.
First, the headline numbers
As I mentioned in my third-quarter write-up, Polycom operates within an increasingly competitive market and has struggled to generate revenue and product sales growth. However, management has successfully cut costs and generated net income growth in response to fading growth prospects. Fast-forward to the latest set of results, and it's a similar story.
On a headline basis, the earnings and guidance were pretty good.
- Fourth-quarter revenue came in at $348.9 million, versus analyst estimates of $347.9 million and internal guidance of $342 million to $352 million/
- Fourth-quarter non-GAAP EPS was $0.24, versus analyst estimates of $0.23 and internal guidance of $0.21 to $0.23.
- First-quarter 2015 revenue guidance is $328 million to $338 million, straddling analyst estimates of $333.5 million.
- First-quarter 2015 non-GAAP EPS guidance matches analyst estimates of $0.20.
In short, revenue and earnings came in ahead of estimates, and guidance for the next quarter is in line with analyst expectations. The company even managed to generate growth in its product sales, albeit with a paltry 0.6% increase. Generating product sales is important, because without an installed product base, any company would find it difficult to generate service sales growth in the future.
A more detailed look
But the headline numbers don't tell the full story. Here's a look at what management guided for this quarter back in Q3, and what actually happened.
| Metric | Q4 Guidance at Q3 | Q4 Results |
|---|---|---|
| Revenue (millions) | $342-$352 | $348.9 |
|
Non-GAAP gross profit margin |
59%-59.2% | 58.4% |
|
Non-GAAP operating expenses as a share of revenue |
47.6%-46.9% | 46.1% |
|
Non-GAAP operating margin |
11.6%-12.3% | 12.3% |
Source: Polycom presentations.
Non-GAAP operating margin came in at the top of its target range, but two other, less comforting figures stand out. First, gross margin came in significantly lower than expectations. Not good. And second, operating expenses as a share of revenue were much lower than internal guidance. That is a good thing, because lower expenses increase profitability.
In short, Polycom beat earnings estimates because it managed to cut operating expenses significantly. For example, fourth-quarter operating expenses were $179 million, a 9.1% reduction from last year. In reality, non-GAAP gross profit fell 0.5% to $203.7 million in the fourth quarter -- not such an impressive performance.
Polycom's guidance
Investors must have been puzzled by the guidance on the earnings call. For example, management promptly guided toward non-GAAP gross margin of 58.8% to 59.2% in the first quarter, indicating a bounce back from the 58.4% reported in the fourth quarter. Analysts were quick to latch onto this point. On the earnings call, participating analysts inquired on the subject of gross margin, and management responded by arguing that its real focus was operating margin. However, a company can only cut operating expenses for so long.
As such, many of the same questions on Polycom's future are still around now. Polycom is struggling for revenue growth, and its gross margin deterioration suggests an ongoing lack of pricing power, even if its headline numbers suggest a rosier picture.
