We upgrade our recommendation to Outperform for Polycom Inc. (PLCM) based on our assessment that the demand for the company’s unified collaborative communication offerings will continue to increase in the near future.  As a result of the severe economic downturn, business enterprises on a global basis are restricting travel budgets to control costs. This makes Polycom’s high-definition telepresence solutions a cost-effective alternative in an increasingly interactive world.

Polycom stands to gain as enterprises, governments, and educational institutions increasingly recognize the productivity-enhancing benefits of video conferencing. The company is a leading solutions provider for video conferencing, with an estimated 30%-40% share of the market. The Flagship RPX and TPX telepresence solutions continue to grow at a healthy rate. Newly launched RMX 2000 HD Videoconferencing Media Server version 4.0, Converged Management Application solutions, and Distributed Media Application solutions have attained encouraging market traction.

In addition, the company has a very sound balance sheet.  During the second quarter, the company achieved its 46th quarter of sequential positive cash flow from operations. A strong net cash position coupled with continued free cash flow generation remains a possible investment catalyst for Polycom especially under extremely tight credit market conditions.

The uniform collaborative communications market is fiercely competitive that has resulted in cut-throat pricing. Tandberg of Norway is the clear market leader in this segment. Cisco Systems (CSCO), Citrix Systems (CTXS), 3COM Corp. (COMS), and LifeSize Communications Inc. are the other major players in this market.

In order to maintain its profit margin, Polycom decided to reduce its workforce by 3% during the third quarter. Management stated that the headcount reduction was necessary to realign and reinvest resources in strategic growth areas. Last January, the company declared that it plans to reduce total headcount by 150 people during the current fiscal. However, Polycom did not initiate any workforce reduction program in the first half of 2009.

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