* Hardware-based videoconferencing seeing reduced demand
* Videoconferencing increasingly moving to cloud-based
software
* Polycom facing budget cuts, competition, restructuring
July 26 (Reuters) - Polycom Inc (PLCM.O) was a big
beneficiary of the 2008 recession, as its videoconferencing products helped
companies cut back executive travel, but the advantage has proven short-lived
as cheaper rivals muscle in on its business.
The company is working on new cloud-based software
products but analysts warn of a rocky couple of years while it makes a
transition from selling expensive hardware.
Polycom is caught between Cisco Systems Inc (CSCO.O),
which dominates sophisticated virtual conference rooms linking offices around
the world, and free videoconference software such as Microsoft Corp's (MSFT.O)
Skype and Apple Inc's APPL.O FaceTime.
Earnings are already being crunched . Polycom reported
Tuesday a 77 percent drop in quarterly net income, as Europe's woes hit its
business.
After two years when revenue growth topped 20 percent
each, analysts see a 2.2 percent decline in sales this year, according to
Thomson Reuters I/B/E/S.
The shares hit a three-year low of $7.45 on Wednesday,
taking their decline to 78 percent from an 11-year high of $34.30 last year
after the appointment of a new CEO. The stock edged up in morning trade on
Thursday to $8.04.
"It's a tough time to be changing the company in
this economy," said Ira Weinstein, an analyst at independent market
research firm Wainhouse Research.
"I believe they will make the transition, but it
will take time. It's not going to be as fast as (CEO Andy Miller) wants it to
be."
The transition to a software-based model will pressure
earnings over the next 12-18 months, Citi Investment Research wrote in a note
on Wednesday.
High turnover of sales staff at the company's key North
American market has added internal pressure to the big change job.
BIG CISCO
Polycom faces a leaner, more competitive Cisco, whose
TelePresence has become the dominant choice in the corporate sector with double
Polycom's market share.
"Cisco outnumbers them in every sales situation and
has more brand recognition, so it's an unfair battle," said Weinstein.
Graphic on
Polycom vs Cisco.
Polycom said in an email to Reuters that it gained market
share over Cisco in the first quarter of 2012, according to market research
firms including IDC, but analysts don't see a major advance on the dominant
player in tough times with so many internal changes.
"It's going to be very difficult to turn the company
around with those headwinds hitting them all at once," Mizuho Securities
USA analyst Joanna Makris said.
Polycom must embrace a cloud-based model to fend off the
likes of Skype, she said.
"(Skype's) free. And in a bad macro, people like
free," said Makris, who has a "neutral" rating on the Polycom
stock.
Competition is also intensifying from smaller, privately
held rivals like Vidyo, which recently received funding from Juniper Networks
Inc (JNPR.N).
FIGHTBACK
Polycom is fighting back. The company, which still gets
most of its revenue from hardware-based systems, is using a software solution
to target smaller businesses, including videoconferencing apps for mobile
devices.
It has made a slew of small purchases to boost its web
presence, including ViVu, a maker of software to embed videoconferencing in
websites and the videoconferencing business of Hewlett-Packard Co (HPQ.N).
The software model has potential as companies can only
afford a few expensive videoconferencing rooms but a software-based solution
could be used to equip thousands of employees.
Videoconferencing companies, used to shipping hundreds of
thousands of units for thousands of dollars, will have to get used to shipping
tens of millions of units for much less each, Gartner analyst Scott Morrison
said.
"That's not an easy transition to make for any
organization and Polycom is not unique," he said.
As well, Polycom, as a standalone videoconferencing firm,
will always be dependent for corporate sales on partners including it in their
telecommunications offerings.
That introduces more risk, as Skype-owner Microsoft is a
key user of Polycom products in its Lync corporate video, email and messaging
product.
Polycom hasn't disclosed how much it gets from Microsoft
but has acknowledged in its annual report the risk that its products could be
replaced by Skype.
"If Microsoft integrates Skype into Lync then it is
really game over for Polycom," Makris said.
The Mizuho analyst said in a post-earnings note that
Polycom's outlook was disappointing and reflected a product and organizational
changes that would take several quarters to execute.
Polycom said Tuesday it continued to restructure its
North American business after appointing four new area vice presidents earlier
this year.
It said David Ruggiero, its president for North America,
would be leaving and it would reorganize its U.S. government sector units into
a new "public sector" business. [ID:nL4E8IO328]
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