Question: When is 20% earnings growth, and 34% revenue growth, bad news?

Answer: When the earnings growth is exactly as we expected, the revenues are less than expected, and -- unfortunately -- the company reporting the news is Motley Fool Rule Breakers recommendation Polycom (Nasdaq: PLCM).

Polycom reported on its first-quarter 2008 numbers yesterday with the results mentioned above. Sales increased to $258.9 million for the quarter, and Polycom predicts further growth is forthcoming as the company expands its "strategic partnerships such as Microsoft (Nasdaq: MSFT), Nortel (NYSE: NT), Avaya, IBM (NYSE: IBM), and others." Which others? Well, we know Polycom also cooperates with heavy hitters Cisco (Nasdaq: CSCO) and Alcatel-Lucent. Meanwhile, pro forma profits came in at $0.36 per share.

Pro forma?
Yeah, I know. Ever since The Bubble, companies speaking Latin give me the willies, too. So let's look at some numbers with more substance to them:

  • Depending on how you look at it, real profits -- the GAAP kind -- did either much better or much worse. At $0.16 per share, they don't look as impressive as the pro forma numbers -- but compared to last year's $0.11 in Q1 earnings they grew 45%.
  • More substantial still was Polycom's free cash flow for the quarter, which skyrocketed 148% to a cool $27 million.

For my money, that's the number to focus on -- the 27 mil. Tack it onto the $108.6 million that Polycom earned over the last three quarters of fiscal 2007, and this company has raked in $135.6 million in free cash flow over the past year.

For a company that's expected to grow its profits at more than 19% per year over the next half decade, that makes for a couple of exceptionally good valuations -- a price-to-free cash flow ratio of less than 15 times for the stock or, if you net out Polycom's cash stash, an enterprise value-to-free cash flow ratio of less than 13 times for the business.

Call me a Fool, but I think Polycom's cheap.

Further Foolishness on Polycom can be found in:

And for the best analysis of the company this side of the CFO's office, read our recommendation in Motley Fool Rule Breakers for 30 days, free.

Fool contributor Rich Smith does not own shares of any company named above. Microsoft is an Inside Value pick. The Motley Fool has a disclosure policy.