(Market Cap $1.85B)
Polycom is one of the key players in open, standards-based unified communications and collaboration (UC&C) solutions for voice and video collaboration.
Some key points that made me take notice when I saw that Starboard Value LP had taken a new position in Polycom shares in Q3-2013:
- The stock has significantly underperformed the S&P 500 and the Russell 2000 over the past few years.
- The company has consistently generated healthy free cash flow over the past ten years. Total FCF during this period has amounted to approximately $1.2B.
- Polycom recently accelerated its stock buybacks, at a very opportune time, in my opinion (see SSM alert dated Sep 14, 2013).
- Its cost structure has got totally out-of-whack, even when compared to its own historical financials. EBIT margin has fallen to high single digits compared to high double digits a few years ago. Management has stated that getting back to HDD EBIT margin is its top priority. Most of the margin deterioration has been below the gross margin line and I think it was largely self inflicted.
- It has a clean balance sheet with a net cash position of approximately $200M.
- Its specific sector has gone through major consolidation over the past few years with Cisco buying Tandberg in 2010 and recent merger of Astra with Mitel.
- It’s trading at a historical low EV/Revenue of approx 1.0 while in a down cycle. In the past 10 years, its EV/Revenue has averaged 2x.
- Its revenues have been impacted by multiple headwinds which appear to be cyclical, not structural. Two main issues that have recently impacted Polycom, its competitors as well as a lot of tech companies are Federal Government budget (as in, the idiots haven’t passed one in years) and a slowdown in China/emerging markets.
- Management is being revamped – this could be a double-edged catalyst but I think it’s more positive than not. CEO was recently let go due to mixing personal expenses with the company’s – good riddance as the cost structure got out-of-whack under his watch.
- As I mentioned earlier, Starboard has taken a new position in it – 3% of the Fund’s total as of 9/30/2013.
While this doesn’t guaranty that Starboard will necessarily take an activist role here, I see it as a big positive given the Fund’s recent successes (AOL, ODP etc).
Key risks that I can see (1) macro headwinds turn out to be deeper or last longer than I currently assume (2) The Board is in the process of hiring a new CEO and I wonder if the new CEO will want to kitchen-sink numbers? (3) Polycom and Cisco have a near-duopoly in this business and you know which one of the two has deeper pockets.