HP’s Next Acquisition: Polycom?

Polycom and F5, leaders in their respective niche areas of video conferencing and application delivery controllers (ADC), recently reported their quarterly results. Cisco recently acquired Tandberg, which is neck-in-neck with Polycom in the video conferencing market. On the other hand, F5 has a comfortable lead over Cisco in the ADC market. Let’s take a closer look.

Polycom (NASDAQ:PLCM), with annual revenue of $967 million, reported second quarter revenue of $294.6 million, up 28%. Net income declined 18% on higher overhead costs to $12.6 million or $0.14 per share compared to $15.3 million or $0.18 per share last year. Non-GAAP EPS was $0.34 versus analyst estimates of $0.32 on revenue of $287.5 million. Gross margin increased to 59.7% from 58.6% last year and the company ended the second quarter with $485 million in cash and investments and no debt. Q1 analysis is available here.

Polycom said the increase in revenue was partly due to the success of its Polycom Open Collaboration Network with companies such as Microsoft, IBM, and HP. Despite increased competition, Polycom saw strong orders from the United States and Asia, while growth was moderate in Europe, the stronghold of Tandberg.

In May, Polycom announced that CEO Robert Hagerty will step down and Andrew Miller, the global field operations chief, will be promoted to CEO. Miller joined Polycom in July 2009 and had previously worked at Cisco and served as the CEO of Tandberg. Interesting defection!

For the third quarter, Polycom expects revenue to grow 2% to 2.5% sequentially. Gross margin is expected to be up by 0.2% to 0.3%. Full-year 2010 revenues are expected to grow in the low 20s compared with high teens growth projected in January. The stock is currently trading around $30 with market cap of about $2.5 billion. Its 52-week range is $21–$34.14.

The video conferencing market has seen much consolidation over the past year. After Cisco’s announcement of its acquisition plans for Tandberg last year, LifeSize was lapped up by Logitech. According to Wainhouse Research, Polycom and Tandberg dominate the $1.7 billion videoconferencing market with 35% and 31% share respectively, while LifeSize has an approximately 5.6% share. Other players include Sony and Aethra, both of which hold less than 10% share.

Videoconferencing revenue grew over 5% in 2009 to about $1.7 billion, and Gartner expects the market to reach $8.6 billion by 2013. Tandberg, with the backing of Cisco, has ramped up its sales and marketing efforts in recent months. John Kell of the WSJ.com reports that Wells Fargo says it is encouraged by Polycom’s improved execution but fears increased competition could put pressure on growth and margins in future periods. As I said earlier, Polycom may eventually need to exit in the arms of either HP or Juniper in order to fight the reinforced camp of Cisco and Tandberg. In particular, HP’s channel would be extremely valuable for Polycom in its fight against Cisco, and for HP, now that 3Com and Palm acquisitions are both complete. I would not be surprised if an announcement comes soon.

F5 (NASDAQ:FFIV) with annual revenue of $653.1 million reported third quarter revenue of $230.5 million, up 11.8%. Net income was $40.5 million or $0.50 per diluted share compared to $22.8 million or$0.29 per diluted share last year. During the second quarter, F5 generated $75 million in cash from operations and after repurchasing shares ended the quarter with $781 million in cash and investments. Q2 coverage is available here.

For the fourth quarter, F5 (NASDAQ:FFIV) expects revenue of $242 million to $247 million with a GAAP earnings target of $0.53 to $0.55 per diluted share. The stock is trading around $87 with market cap of about $7 billion. It hit a 52-week high of $77.96 on July 12.

Zeus Kerravala on Yankee Group Blog asks, “Can Anything Derail F5?” Cloud computing, virtualization, and mobile applications are some of the trends that are driving F5’s growth. In the second quarter of 2009, F5 led the ADC market with a 38% share compared to Cisco’s 26%. Unlike the video conferencing industry, F5 doesn’t have to face much competitive pressure from Cisco, whose focus lies elsewhere, leaving F5 to continue dominating this area.