Polycom (PLCM) has struggled to find top-line growth so far in 2015, and its latest quarter was no exception. After the video-conferencing specialist announced another quarter of mixed results, Polycom stock fell around 2% in Wednesday's after-hours trading.
The headline numbers
Specifically, Polycom's second-quarter revenue declined 5% year over year to $316.6 million. That translated to 1% growth in adjusted net income to $29.9 million, and a 5% increase in earnings per share to $0.22. Analysts, on average, were anticipating the same earnings of $0.22 per share, but on significantly higher revenue of $332.5 million.
Polycom CEO Peter Leav elaborated, "In the second quarter, we delivered year-over-year growth in operating margins and earnings per share consistent with our expectations, despite a more challenging quarter from a top-line perspective. We continue to be focused on investing in new solutions for both core and adjacent markets and working closely with our strategic partners, while improving sales execution in the field."
Surprise?
But this also shouldn't come as a big shock. Exactly one month ago, Polycom stock plunged after William Blair analyst Jason Ader worried that the company was facing pressure from a combination of increasing competition, its recent channel partner program overhaul, and weak video demand and sales execution. And recall that last quarter, CEO Peter Leave admitted during the subsequent conference call that Polycom probably lost share in North America as peers such as Cisco ramped up efforts to launch and promote their own competing videoconferencing solutions.
But with William Blair's late 2013 warning of Cisco's ending its relationship with Polycom still fresh on investors' minds, arguably more concerning were Ader's worries over Polycom's future relationship with key partner Microsoft, which launched its own videoconferencing solution earlier this year in the form of Microsoft Surface Hub.
Digging deeper
Sure enough, revenue in all geographies declined in Q2. But just as the market had feared, Polycom was hit hardest in its core Americas region, where sales fell 6% year over year to $158.3 million. Meanwhile, revenue in Europe, the Middle East, and Africa fell a more modest 3% over the same period to $80.9 million, while Asia-Pacific sales dropped 5% to $77.4 million.
By product category, Polycom's core UC Group Systems also suffered an 11% drop in revenue to $195.2 million, and UC Platform sales plunged 9% to $54.6 million. To its credit, though, Polycom simultaneously drove solid 25% year-over-year growth in sales of UC Personal Devices, to $66.9 million.
At the same time, Polycom has worked hard to compensate for its top-line weakness by bolstering its bottom line. Polycom has done so through a combination of strategic cost-cutting -- which largely drove its 1% growth in net income a dollar basis -- and using its cash to reward investors through ongoing share repurchases, including $25 million in buybacks during the most recent quarter. And Polycom has the funds to do so, having generated healthy operating cash flow of $33 million last quarter and ending the period with $421 million in cash and investments net of debt.
Nonetheless, the fact remains that Polycom is still operating in a tough competitive environment that will probably only intensify going forward. In the end, if the past two quarters are any indication, it appears Polycom has plenty of work to do if it hopes to improve sales execution and resume profitable top-line growth.
