The screen is green: Looking into videoconferencing

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From Times staff writer Edward Silver:

Remember Compression Labs Inc.? Of course not. In the early 1990s, CLI had Intel Corp. as an investor and was seen as a standard bearer for a technology sure to become a must-have for the modern corporation: videoconferencing.

That’s the setup that enables an executive in Los Angeles to view a product demo in London while clad in Armani on top and Juicy Couture below. The excitement around videoconferencing faded, however, as the early adopters recoiled from jerky visuals and outsize costs. Eventually, Compression Labs was absorbed by a rival, also floundering, for less than $5 a share.

After such a long time, it seems, videoconferencing’s time has come. Sales are vibrant at the industry’s top dogs, East Bay-based Polycom Inc. and Tandberg of Norway, and behemoths Cisco Systems Inc. and Hewlett-Packard Co. are moving into the field. Why? In this globalizing era, the technology opens a window on anywhere in the world you want to do business.

The clean-and-green theme, however, has come to the fore of the purchase proposition. Why consume a reservoir of fuel and spew literally tons of carbon into the air -- while spending big -- when you can get face time with far-flung colleagues, suppliers and clients without leaving the office?

In an eye-opening sign of the industry’s arrival, Tandberg reported Wednesday that it was in buyout talks with an unnamed private equity firm rumored to be Silicon Valley-based Silver Lake. Tandberg’s shares jumped more than 15% on the Oslo exchange. With that news, a bull’s-eye was hung on Polycom’s back, as speculation rose about a potential bid from Cisco or HP. According to brokerage Wedbush Morgan, Polycom and Tandberg split 80% to 90% of the global videoconferencing market last year.

Cisco marched into the market in late 2006, focusing on the high end. Some Cisco packages require dedicated rooms and cost hundreds of thousands but create an experience observers dub ‘immersive,’ ‘lifelike’ and generally awesome. In the most recent quarter, sales of the product line sextupled from the small base of a year earlier, though Cisco won’t disclose figures....

... With total revenue at the San Jose giant running at $40 billion annually, videoconferencing itself won’t transform the sales outlook. But Cisco loves bandwidth hogs; this kind of equipment ups the demands on the data network that it specializes in meeting. Indeed, the smart networks Cisco helped build have a lot to do with the pretty-as-a-picture production values of modern videoconferencing.

Tandberg is a pure play, but Polycom develops tools for video and audio conferencing. The video segment is slightly bigger and growing faster, drawing analysts’ notice. Buy ratings abound on the shares, yet the stock is flat on the year.

Polycom’s second-quarter report on July 16 drove some away. The company beat revenue forecasts, but earnings of 35 cents a share missed by a penny, and margins disappointed. The stock sank to $21.70 but has since rebounded, closing Friday at $27.92.

Analyst Bill Choi of Jefferies & Co. blames the second-quarter stumble on costs for bulking up the sales force to market top-flight, Cisco-style systems. For fiscal 2009, he expects $1.26 billion in revenue and per-share profit of $1.75. That implies a fairly sober forward price-to-earnings multiple of 16.

Furthermore, Cisco’s entry is a positive for Polycom, as Choi sees it. He has a point. ‘Polycom is the representative brand,’ he said. ‘When Cisco spends a lot on marketing, even though its product line is limited, it creates an awareness that benefits the market leader.’

Whether or not Polycom can piggyback the promotions, if Cisco is in your face and it’s not carrying flowers, start worrying.

Polycom also may be worried about the low end, contested by LifeSize Communications Inc., a private company in Austin, Texas. It sells less pricey packages for the desk and conference room that preserve high-def quality, Choi says.

The analyst sees LifeSize’s sales expanding 50% this year into the range of $60 million to $80 million. In more receptive times in the stock market, that easily would be enough to justify an IPO.

The client roster at LifeSize demonstrates traction for both the company and the industry. There’s tech titan IBM, but also Paramount Pictures. Blackstone Group is on the list, along with UC San Diego. And an especially surprising name: the Korean Ministry of Reunification. You can almost hear the pitch. ‘Videoconferencing: When you’d rather not cross a hair-trigger border.’