(PLCM) Polycom Analyst Remains Neutral on Shares

We reaffirm our long-term Neutral recommendation on Polycom Inc. (PLCM). The company reported mixed financial results for the second-quarter 2011.

Despite facing competitive pressure from Cisco Systems Inc. (CSCO), Polycom’s high-margin Network Infrastructure Systems businesses grew 51% in the last quarter. Strong momentum of the Network Infrastructure division is a significant positive for Polycom since this division drives overall margin of the company.

We believe long-term fundamentals of the videoconferencing industry remain compelling. Besides, the U.S. and several European countries are suffering from debt crisis. For that, business enterprises are restricting their respective travel budgets as a cost control measure.

This makes Polycom’s HD telepresence solutions a cost-induced alternative in an increasingly interactive world. However, growing competition in the videoconferencing market is a near-term cause of concern.

At present, Polycom remains the only pure play unified collaborative solutions provider. The company 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 40% share of the market. Additionally, Polycom is streamlining its cost structure by reducing headcounts in order to realign and reinvest resources in strategic growth areas.

While Polycom successfully counter Cisco and was able to regain market share from it, the newly entrant players, such as Logitech International S.A. (LOGI) and Microsoft Corp. (MSFT) makes the competitive landscape more intense. Polycom also replied accordingly and decided to purchase Visual Collaboration Business of Hewlett Packard Co. (HPQ) that includes its Halo Products and Managed Services. Acquisition of H-P’s video conferencing unit will enable Polycom to expand into lucrative desktop and mobile video conferencing market.

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