Cisco-Tandberg impact in spotlight as Polycom reports

On Oct 1, Cisco struck a deal to buy Norway's Tandberg for $3 billion in a bid to dominate the
high-growing market of corporate video communications.

"A lot of the near-term business is going to matter less today because of what happened with Cisco's acquisition of Tandberg," William Blair analyst Jason Ader said. "The focus on the earnings call is going to be, 'How does this impact Polycom?'"

"Does life get better for Polycom? Or does life get worse for Polycom now that their main competitor has been acquired by the 800-pound gorilla in the market?" Ader said.

Cisco's move will help Polycom in the short term as uncertainty among customers and resellers could help it gain market share, but over the long haul it will face the uphill task of taking on Cisco, analysts said. Polycom is also considered an acquisition candidate in the wake of the Cisco deal.

For the third quarter, the company is expected to post quarterly earnings above market estimates due to improving demand for its products in North America, possible market share gains and growth at its infrastructure business.

Analysts expect Polycom to earn 31 cents a share, excluding items, on revenue of $236.4 million, according to Thomson Reuters I/B/E/S.

"Our checks suggest Polycom is seeing good demand in its core video conferencing segment. We also believe the voice business will likely recover as the economy stabilizes," Jefferies & Co analyst William Choi wrote in a note to clients.

In the second quarter, Polycom recorded sequential revenue growth in North American and Asia, while revenue from Europe fell.

"In term of geographic mix, demand trends are improving in North America," Choi said. "In addition, third quarter should benefit from seasonal strength in the U.S. federal segment."

Piper Jaffray analyst Troy Jensen said a key highlight of the quarter would be the infrastructure business -- a roughly 15 percent contributor to revenue -- which he expects to record modest growth.

Polycom's results could also give an indication of how IT spending is recovering.

Its voice business is the best indicator of IT spending, as video has become less discretionary, Jensen said.

"Typically phone systems are tied to headcount growth," he said. "If you see any growth in the voice business, that is a good datapoint that IT spending has (picked) up here."

Polycom shares have risen 56 percent in the past six months.

Last week, Tandberg beat forecasts with a rise in third-quarter operating profit and said customers had reacted positively to the bid from Cisco Systems.

 Q3 2009E       Q3 2008       Percentage change
 EPS (adjusted)    $0.31          $0.37         -16
 Revenue (million) $236.4         $275.8        -14
 Gross margins     58.84 pct      60.21 pct     -2

 (Reporting by S. John Tilak in Bangalore; Editing by Anil D'Silva)