Economic Uncertainty Casts a Shadow Over Videoconferencing - Q1 Market Update
Disappointing Q1 results from market leaders Cisco and Polycom, coupled with a mellowed guidance for Q2, do not bode well for the videoconferencing markets. Revenues nose-dived in Q1 raising the big question - can videoconferencing continue the phenomenal climb it has seen over the last several quarters?
Our recent research indicates that 2011 was a watershed year for videoconferencing. Revenues for endpoints and infrastructure systems surged to $2.8 billion in 2011, growing at 22 percent over prior year. Prices were stable and user demand remained strong throughout last year.
Q1 2012 Videoconferencing Revenue Highlights
- Revenues grew 10% Y/Y with endpoints growing at 11.4% and infrastructure at 6.6%. Most vendors with the exception of Cisco reported a Y/Y revenue decline. Cisco was an aberration primarily due to its low sales in Q1 last year. Q1 2011 was a weak quarter for Cisco, largely due to channel issues and delayed orders resulting from transition of its ordering system after the Tandberg acquisition.
- Q/Q revenues declined by a whopping 22.6% from $830.7M in Q4 2011 to $642.9M in Q1 2012. Endpoints declined by 21.5%; infrastructure decline was 25.4%. This seems to be 2 to 3 times the seasonal dip normally seen in the first quarter of the year.
- Among the major vendors, the biggest Q/Q decline came from Cisco followed by Polycom, leading to a market share loss for Cisco in Q1. Radvision reported better than expected Q1 earnings and LifeSize held its revenues stable.
Top Reasons for a Soft Q1
A confluence of several factors are coming into play in the videoconferencing markets.
- An uncertain economic climate – Concerns about the state of the global economy and cautious spending is putting a damper on videoconferencing growth. Vendors are reporting longer sales cycles and delays in the approval process. Furthermore, with the exception of travel reduction, the soft benefits of videoconferencing make it a hard sell to decision makers that are focused on the overall bottom line.
- Sales restructuring and channel issues – Major vendors have cited internal delays due to reorganization of sales teams as they move from selling point videoconferencing products to broader UC solutions. Polycom continues to show weakness in North America as it works on improving sales execution in the region.
- Impact of alternatives - Microsoft's increased marketing efforts around Lync being enterprise ready for voice in addition to its collaboration offerings has led customers to evaluate Lync as an alternative, leading to delays in the decision making process. Microsoft reported a 35% revenue growth in Q1 for Lync. Citrix Online reported a 29% revenue growth for its collaboration products with strong adoption for HDFaces video over PCs and mobile devices. We expect customers will continue to evaluate and adopt alternatives to traditional telepresence solutions to meet their collaboration needs.
- Pricing pressures - A significant slowdown in adoption of high end immersive telepresence suites as well as greater competitive pressures from vendors such as Huawei and Vidyo, that continue to nibble away market share, are leading to lower prices in the industry and impacting revenues.
- Seasonality and buying patters - Q1 has traditionally been the weakest quarter for videoconferencing industry due to the buying cycles. Following on the heels of strong purchasing in Q4, customers are focusing on roll outs during the early part of this year. 2010-2011 was when wallets began to open up and now we are starting to see those deployments settle in. We expect to see a buy- deploy- use- upgrade cycle.
Despite the Q1 market performance we believe the long-term forecast for videoconferencing remains strong. Vendors are stepping up their game with a focus on stronger sales execution and investments in innovation. Video will continue to be top of mind as the next-gen mode of communications, with a bulk of the market remaining under penetrated. At the same time, it is now well understood that the face of videoconferencing is changing at a fast pace. End user discussions have shifted away from being exclusively focused on high-end telepresence to now include video to desktops and mobile devices and being able to do so economically. The emergence of tablets as a videoconferencing device and the impending shift to software-based solutions coupled with the impact of cloud-based delivery will open up new opportunities and at the same time upend established business models.