Home > Stock Analysis

Virtual Meetings Go Mainstream

By Will Ashworth

Tickers in this Article: OTCBB:TNXI, TWX, CSCO, HPQ, PLCM

The Association of Corporate Travel Executives (ACTE) recently released survey results indicating company employees will travel less in 2009, and when they do, they won’t spend as much. It seems economic uncertainty, combined with rising fuel costs, has many businesses reassessing their future travel plans.

Get Free Stock Analysis By Email

If employees aren’t hitting the road as often as they once did, something will need to replace the traditional face-to-face meeting. First, there was teleconferencing, then videoconferencing and now something called telepresence, which is videoconferencing on steroids. The demand for unified collaboration solutions is real.

What Took So Long?
My wife is a district manager for a Canadian retail chain. She manages stores across the country. If she was in the United States, she’d substitute Toronto and Vancouver for Pittsburgh and Portland. That’s approximately 2,500 miles of geography. It’s no easy task maintaining such a large territory. Even simple things like store inspections become logistical nightmares. It would be so much easier if there was a way to do this from her home office in Toronto. Apparently, now there could be. With technology improvements made daily in audio and video presentation, videoconferencing is becoming mainstream.

Videoconferencing was an estimated $1.1 billion market in 2007 and is rising, according to the business research and consulting firm Frost & Sullivan. In 2007, videoconferencing grew 29% from a year earlier. In addition, 176,000 videoconferencing systems were sold last year compared to 115,000 in 2004. Telepresence didn’t even exist in 2004. Now just three years later and 1,000 systems sold in 2007, sales in North America are predicted to grow to $610.5 million by 2013.

The Price Will Drop
However, for most companies telepresence systems are still out of reach. Hewlett-Packard’s (NYSE:HPQ) Halo system costs $425,000; Cisco (Nasdaq:CSCO), Teliris, Tandberg and Polycom (Nasdaq:PLCM) all have systems in the $300,000 range. They are certainly an appropriate expense for executives who do a lot of first-class travel to company offices around the globe - far more beneficial than a corporate jet, in my opinion. One recent example is Time Warner (NYSE:TWX) implementing Polycom’s RPX telepresence system so that CEOs from its four divisions could communicate better.

That’s pocket change for a company with $47 billion in revenue over the last 12 months. Long-term viability, however, will require a significant drop in price so small- and medium-sized businesses can also afford them. A lower price would also allow competing with new entrants. Polycom’s biggest competition could come from Telanetix (OTC:TNXI), a small Washington state company offering its own telepresence system for between $40,000 and $175,000. Mercedes Benz is a client, and more will buy if the product is reasonably reliable.

Recurring Revenue
Polycom, as well as competitors Cisco, HP, Telanetix and Teliris, all make money in two ways. First, they profit from the upfront cost to build a telepresence room; and second, from the monthly fee to manage it, generating significant recurring revenue. 2007 was a record year for Polycom, achieving $929.9 million in revenue, up 36% from 2006. Excluding acquisitions, its growth was a respectable 20% with operating cash flow of $149.5 million, also a corporate best. (For related reading on cash flow, check out Operating Cash Flow: Better Than Net Income?)

Started in 1990, Polycom's sales have grown from $420.4 million in 2003 to its present level and operating income from $26 million in 2003 to $77.2 million in 2007. If not for several unusual expenses in 2007, it would have been a record year on the bottom line as well.

Sceptics Abound
Polycom's stock is down 18% in the last 52 weeks - not so bad when you consider the S&P 500 is down more than 30%. However, shorts hold 20% of the float. Barclays downgraded Polycom from “overweight” to “equal weight” on October 6, and while its shares did jump to $28.20 in mid-August when rival Norwegian company Tandberg ASA announced it received a bid to acquire the business, it’s down substantially since. (Speaking of "shorts", a good read is: Short Interest: What It Tells Us.)

Fundamentally, Polycom's business is sound. Q2 revenues ending June 30 were $271.6 million, up 16% from $233.9 million in Q2 2007. Its operating income was up $5.2 million to $22.5 million, producing an operating margin of 8.3%. That’s 90 basis points higher than Q2 2007. Also in the quarter, it repurchased $80 million in stock, which helped improve earnings per share from 11 cents to 20 cents year-over-year. Topping off a great year, in late September it received a Rising Star Award from the Global Technology Distribution Council (GTDC) recognizing it as a fast-growing manufacturer that deals with GTDC members.

Bottom Line
I’m not a huge technology buff. This is probably due to my lack of technical proficiency. That said, I do know when I see a good thing, and this next-generation videoconferencing seems like a godsend for managers looking to control costs but maintain open communication with branch offices in far-away places.

While Polycom doesn’t have a lock on this segment of the market, it appears to be a serious contender. Adding close to 250 salespeople in 2007, it will need to be at the top of its game if 2008 is to be nearly as successful. So far, it looks like it’s up to the challenge.

By Will Ashworth

Will Ashworth lives and works in Toronto, Canada. He's worked in and around the financial services industry for much of his adult life. He loves investing and is passionate about helping others learn how to put their money to work.

MORE STOCK ANALYSIS