Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Polycom (NASDAQ:PLCM)

Q1 2013 Earnings Call

April 23, 2013 5:00 pm ET

Executives

Laura Graves

Andrew M. Miller - Chief Executive Officer, President and Director

Eric F. Brown - Chief Operating Officer, Chief Financial Officer and Executive Vice President

Analysts

Timothy Long - BMO Capital Markets U.S.

Kent Schofield - Goldman Sachs Group Inc., Research Division

Jess L. Lubert - Wells Fargo Securities, LLC, Research Division

Michael Latimore - Northland Capital Markets, Research Division

Chelsea Shi - UBS Investment Bank, Research Division

Mark Sue - RBC Capital Markets, LLC, Research Division

Operator

[Audio Gap]

Please go ahead, ma'am.

Laura Graves

Thank you, Thaddeus. Good afternoon, everyone, and welcome to Polycom's First Quarter 2013 Financial Results Conference Call. I'm Laura Graves, Polycom's Vice President of Investor Relations and here with me today are Andy Miller, our President and CEO; and Eric Brown, Chief Operating Officer and Chief Financial Officer.

As with previous quarterly calls, Polycom is augmenting today's voice conference call with a video webcast. If you would like to receive the full webcast, please open your browser at this time, and enter Polycom's homepage, which is polycom.com and click on the Q1 2013 earnings call link.

The Q&A session will be hosted via audio stream. For the analysts participating in the Q&A session, please leave your voice call live so you can use your conference call connection for the Q&A session at the end of our call. We welcome all others to listen in to the Q&A session.

This webcast and a transcript of the prepared remarks will be maintained on Polycom's website for up to 3 months.

We will be making forward-looking statements on this call, including statements related to new and future product offerings, future offerings with our partners, future financial and other trends and expectations and guidance regarding expectations of future financial performance, which are subject to risks and uncertainties that could cause actual results to differ materially from our expectations.

We discuss a number of these business risks that may cause our actual results to differ in Polycom's SEC reports, including our most recently filed annual report on Form 10-K for the year ended December 31, 2012.

Any forward-looking statements must be considered in the context of such risks and uncertainties.

Please note that any financial guidance that we provide on this call is valid as of today only and we do not assume any responsibility to provide updates of this guidance regardless of changes that may occur in the future.

We will be presenting both GAAP and non-GAAP financial measures today. Please refer to our reconciliation of GAAP to non-GAAP financial measures in today's earnings release, which is posted on our website.

Polycom's application of U.S. GAAP requires disclosure that availability of new products, planned features and upgrades discussed during this call are subject to change or cancellations. Products and related specifications referenced herein are not guaranteed and will be delivered on a when-and-if-available basis. Now to begin our commentary on Q1 2013 financial results, please let me turn over to Polycom's President and CEO, Andy Miller. Andy?

Andrew M. Miller

Thank you, Laura. Good afternoon, everyone. Polycom reported solid financial performance in Q1, including revenue of $339 million in the first quarter of 2013 at the upper end of our guidance range of $330 million to $340 million. Non-GAAP earnings per share in Q1 were $0.13 and above the high end of our guidance. We are extremely proud of these results at Polycom.

At Polycom, our vision is to make video collaboration truly ubiquitous. To deliver on this vision, our strategy is to make video collaboration simple to use and available to everyone through open standards-based software that connects people securely across any network, protocol, application or device.

The Americas theater grew 3% on a year-over-year basis in Q1. Our U.S. sales team is performing very well. We saw strength in U.S. enterprise, offset by the impact of budget constraints in the U.S. public sector verticals of government, education and medical.

EMEA and Asia Pacific both posted revenue declines on a year-over-year basis. EMEA revenue was down 5% year-over-year due to a general and prolonged slowdown in IT spending in Europe.

In APAC, the year-over-year revenue decline of 10% was generally due to a temporary slowdown in China as predicted, as well as year-over-year revenue decline in India, albeit a smaller territory for Polycom.

Through our product category standpoint, UC Personal Devices grew 8% year-over-year in Q1, driven by Microsoft Lync compatible devices. UC Group Systems declined 3% on a year-over-year basis and UC Platform declined 4% year-over-year, both due to primarily -- due to prolonged procurement cycles in the public sector.

Our Services business grew 10% on a year-over-year basis as a result of higher maintenance of tax rates on solutions and showing the increasingly importance of services in the overall solution that Polycom delivers.

Polycom has announced and is now shipping a comprehensive set of breakthrough innovations to extend our best-in-class portfolio. We announced general availability of our Polycom RealPresence Group Series 700 rounding out the Group 300 and 500 next-generation room system endpoints with a completely redesigned user interface. The industry's most lifelike high definition video and content quality, Polycom's smart pairing technology that enables automatic pairing between a Polycom room system and a tablet for ease-of-use, an innovative video, content sharing and audio features that are only available from Polycom.

The Polycom RealPresence Group Series includes support for Polycom's open standard-based scalable video coding, otherwise known as SVC, powered by the Polycom RealPresence Platform resulted in 3x HD multipoint video call capacity for greater scalability, dramatically lower total cost of ownership, superior video performance and backwards and forwards compatibility to protect our customers' investments.

At the end of Q1, we also began shipping the Polycom RealPresence CloudAXIS Suite as an extension to the Polycom RealPresence Platform. CloudAXIS software enables universal access to enterprise-grade interoperable video collaboration to any business or consumer at the highest quality, reliability and security. This means that Polycom enterprise customers can extend secure enterprise-grade video collaboration to anyone with a browser simply by sending a URL, link via an IM, email or calendar invite. This is a very bold move for Polycom, and we believe will add tremendous value to our customers. We also expect this new solution will eventually result in pull through of the RealPresence Platform revenue for Polycom.

We announced the next-generation dedicated video conferencing room system referred to as Lync room system for Microsoft Lync 2013, along with new software extensions to the Polycom RealPresence Platform that will deliver Lync 2013 interoperability across our video and voice solutions for superior collaboration experience.

And just last week, we launched the new Video SmartStart offerings. These are simple all-inclusive turnkey solutions with everything a customer needs to deploy Polycom RealPresence CloudAXIS Suite in 1 SKU including Polycom RealPresence Platform with implementation, maintenance and adoption services. We believe these offerings make it much easier for customers to deliver video across their organizations and will also create new opportunities to drive sales of UC Platform.

Now, I'd like to highlight key customer wins in Q1 that demonstrate new product traction. Eric will provide additional results on new product category growth in the financial portion of this call.

A large university in Saudi Arabia with over 32,000 students is expanding with a new women's college campus extension. To this important initiative, the University purchased 42 Group Series 700 and over 300 Group Series 500 systems to facilitate e-learning and video classrooms between campuses. Superior functionality and interoperability enabled us to win this important project from a key competitor.

Standard Bank of South Africa recently expanded its operations across 17 countries and 1,200 branches. The customer required voice, video, infrastructure and services to enable a robust Unified Communications and Collaboration solution across the organization.

Polycom partnered tightly with Microsoft, leading system integrator, Dimension Data, and our local distributor, Kathea, to build a scalable, multivendor environment at a low total cost in ownership and excellent return on investment.

The office of the Ministry of Health in Chile chose Polycom to enable executive communications, video streaming for health training and video mobility for health support inside the hospital. This win included a broad range of UC Group products, as well as executive desktops and services. Our product characteristics of open standards and native interoperability with Microsoft were key to this important win.

Our Fortune 100 manufacturing firm standardized globally on a CX5000, a unified conference station optimized for Microsoft Lync, integrating conference rooms to their global link rollout. These rooms will be used for executive and business-to-business conferencing and what was a strong win against Cisco's systems.

And finally, in the health care arena, we're excited to announce that National Health Service Lothian upgraded its RealPresence Platform by adding CloudAXIS to provide health care clinicians with an easy-to-use and secure method of communicating with patients at home using their own devices. NHS provides health care services for approximately 800,000 people in Scotland. This virtual clinic model will change the way that health care is provided in that country simply by adding CloudAXIS to the existing video capabilities of their organization.

Turning to strategic alliances. Microsoft continues to be the leading strategic alliance partner to Polycom. Microsoft and Polycom are collaborating jointly on Lync, which grew 30% again this quarter.

Microsoft compatible devices, a subset of Polycom, UC Personal Devices, grew 40% year-over-year, demonstrating the value of the Microsoft-Polycom solution.

On the carrier side, we announced the expansion of our strategic relationship with AT&T in Q1. AT&T has chosen Polycom's RealPresence Platform as part of the AT&T Telepresence Solution video infrastructure to provide interoperability within the AT&T Business Exchange in which will be used by AT&T Telepresence Solution to build their next-generation video as a service offerings.

In addition, AT&T Telepresence Solution customers will now have access to a range of Polycom RealPresence video solutions, including immersive and multipurpose rooms and personal systems as part of the AT&T Telepresence Solutions Managed Service Bundle. This is a key win for Polycom and we continue to work with AT&T to complete the extensive solution and product certification of the RealPresence Platform.

Polycom's RealPresence Platform is now powering approximately 40 service and solution providers globally to offer Video-as-a-Service or to drive pull through revenue for Polycom endpoint solutions.

IBM shared innovator previews of UC&C solutions that will launch in late 2013 at both IBM Connect and Team Polycom. These solutions provide full support and interoperability with Polycom video solutions. We continue to be excited about the expansion of the go-to-market and joint selling initiatives between Polycom and IBM, which we believe should prove beneficial at the latter part of 2013.

We believe these sample customer wins, continued traction with our strategic alliance partners and our solid financial results for Q1 are confirmation of Polycom's leadership as the only pure play UC&C provider with size and scale to deliver interoperability, cloud and virtualized options that will move the industry forward.

I'd now like to turn the call over to Eric to review our detailed Q1 results and guidance. I will return following Eric's section to wrap up and lead the Q&A section. Eric? Thank you.

Eric F. Brown

Thank you, Andy. Polycom generated revenues of $339 million in Q1 2013, which is above consensus and at the high end of our guidance range of $330 million to $340 million. Q1 non-GAAP earnings per share were $0.13 above the upper end of our $0.10 to $0.12 EPS guidance range.

Looking at revenue by geography, Americas revenues were down 2% sequentially and up 3%, compared to the same period last year. Results in North America were impacted by slower U.S. public sector spending and year-over-year Q1 softness in Canada public sector.

EMEA revenues were down 5% both sequentially and year-over-year, largely as a result of the ongoing macroeconomic situation in Europe. EMEA performed slightly ahead of our internal expectations.

Asia Pacific revenues were down 7% sequentially and down 10% compared to last year. Within the APAC theater, China was down 19% year-over-year, but in line with our expectations for a temporary slowdown through Q1 2013. We expect to see an improvement in China beginning in Q2. As a reminder, China historically represents 40% to 50% of revenue in Asia Pacific.

Revenue by product category, including the services attached to each, was as follows. UC Group Systems, which includes immersive telepresence, group video and group voice systems was down 2% sequentially to $232 million or 69% of revenues. This product category was down 3% year-over-year, primarily as a result of lower public sector spending in North America.

UC Personal Devices, which includes all desktop video devices and desktop voice was up 5% sequentially to $49 million, representing approximately 15% of revenues in Q1. This product category was also up 8% year-over-year as a result of PBX refresh cycles and Lync voice deployments.

UC Platform revenue, which includes the Polycom RealPresence Platform, was down 60% sequentially to $57 million comprising 17% of revenues in Q1. UC Platform was down 4% on a year-over-year basis, primarily as a result of lower public sector spending in North America.

Our Q1 revenue mix was 73% product and 27% services. Product revenue is down 6% both quarter-over-quarter and year-over-year. Services revenues were up 2% sequentially and up 10% year-over-year.

From a channel standpoint, the revenue breakdown for the first quarter is as follows: 25% through value-added resellers, 66% through distributors, 7% through service providers and 2% direct. Please note that approximately 6 percentage points of our distribution business in Q1 was driven by the ITS fees and other service providers fulfilled through distribution, making service provider revenue 13% of the Q1 total.

Now I would like to provide the information on ideal metrics. The following is based on information reported by the field. Please note that this information is not complete in terms of our total transaction volume and is based on a bookings view of transactions closed in our Salesforce.com system, not GAAP revenue. This is intended to provide the basis for a representative view of the quarter.

We had a total of 8 transactions greater than $1 million this quarter, compared to 20 in Q1 last year. The number of transactions ranging from $0.5 million to $1 million was 26 in Q1 '13 versus 38 in Q1 '12. Midsized transactions in the $250,000 to $500,000 range were 71, compared to 93 in Q1 last year. We had a total of 470 transactions greater than $100,000 this quarter compared to 591 in Q1 last year.

We believe that the Q1 year-over-year reduction and the number of larger deals was primarily related to the elongation of procurement cycles for public sector transactions. In a typical quarter, approximately 1/4 to 1/3 of Polycom's product revenue is related to public sector transactions, which includes federal and local level government, education and health care entities.

In terms of linearity, we recorded 48% of revenues in the third month of the quarter, compared to 50% in Q1 last year.

Moving to the P&L, non-GAAP gross profit margins for the first quarter were 59.9% flat with Q4 and down 1.1 percentage points from Q1 last year, primarily as a result of the lower UC Platform mix. There's no significant change in the competitive pricing environment in Q1 versus Q4.

Q1 non-GAAP operating expense line items were as follows: Sales and marketing expense represented 30.1% of revenues for the period, essentially flat with Q1 last year. R&D expense was 15.1% of revenues, up compared to 13.1% in Q1 last year. And G&A was 5.8% of revenues versus 4.9% in Q1 last year.

The percentage increases are a function of lower total revenue versus the comparable period last year, the semi-fixed investment we are making in engineering to coincide with the launch of our new product portfolio, and the cost of our new headquarters location at San Jose.

Q1 non-GAAP operating income was $30 million or 8.8% of net revenues. This compares to $44 million in non-GAAP operating income or 12.7% of net revenues in Q1 of 2012. Other income and expense in Q1 is a net expense of approximately $0.8 million comprised of $0.3 million of net interest income to approximately $1.1 million of other expenses, including the impact of foreign currency, equipment disposals and non-income-related taxes in certain geographies.

Our Q1 non-GAAP effective tax rate was 20%. Our GAAP tax provision was a net tax benefit of $3.4 million, primarily due to discrete items, including the retroactive reinstatement of the R&D tax credit.

Q1 GAAP diluted EPS was $0.01 per share, compared to $0.08 per share in Q1 last year. Q1 non-GAAP diluted EPS was $0.13, compared to $0.20 in Q1 last year.

Turning to the balance sheet. We exited the first quarter with cash and investments of $728 million, with $282 million of onshore cash in the U.S. We have just over $4 per share in cash and investments.

Polycom's deferred revenue grew to $253 million in the first quarter, growing 1% sequentially and 8% versus last year. Deferred revenue grew on a year-over-year basis as a result of an increase in software maintenance agreements associated with UC Group and UC Platform products.

We purchased $34 million of common stock under our share repurchase program in Q1. This is approximately 150% more than the average quarterly repurchase amount in 2012. Our total outstanding repurchase authorization as of March 31, 2013 was $39 million.

In Q1, Polycom acquired the assets of Sentri, Inc. for less than $10 million. Sentri is a services firm that specializes in UC&C and Microsoft Lync solutions. This acquisition augments our advanced services and partner capabilities as we help customers navigate phased, sometimes complicated UC&C rollouts.

Moving to accounts receivable. We ended the quarter with total AR of $180 million resulting in a DSO of 48 days versus 50 days last quarter and 52 days in Q1 last year. Inventory turns in Q1 were 5.6x, compared to 5.7x last quarter and 5.0x in Q1 last year. We generated $49 million in operating cash flow in the quarter.

At a trailing 12-month basis, our operating cash flow was $204 million. With just over $4 in cash per share as of the end of Q1, our current enterprise value is approximately 5.5x our trailing 12-month operating cash flow.

Moving to headcount. Polycom had 3,800 employees at the end of Q1, a 1% increase from the end of Q4. By expense area, we had the following number of employees: Cost of goods, 811; Sales and Marketing, 1,248; Research and Development, 1,152; and G&A, 589.

This total includes approximately 60 new employees from the Sentri acquisition. This part of our 2013 plan, we expect to add headcount in sales during 2013.

Before turning to guidance, I'd also like to provide new metrics to track the progress of our new product releases. We are beginning to see early signs of traction with our new Group Series products. In Q1, new Group Series product revenue was $16 million, representing 16% of total group video product revenue. Our CloudAXIS and 800s software revenue was negligible for Q1.

Moving on to guidance for Q2 2013. The following key assumptions are reflected on our Q2 guidance. We are encouraged by progress with our recent product releases, including the new Group Series 300, 500 and 700 products, as well as the RealPresence collaboration server 800S Virtual Edition. We are optimistic about the prospects for our CloudAXIS offering and we'll continue to offer training and education to support these new products.

At a macro level, we assume there will be continued pressure on public sector spending. We anticipate revenue improvements in China in Q2 and we assume a status quo demand situation in EMEA.

Based upon these factors, our Q2 guidance is as follows: Revenue ranging from $335 million to $345 million, with the key variables in our view being public sector spending, offset by improving revenue levels in APAC. The low end of the revenue guidance range reflects delays in the procurement cycles for public sector that we are currently seeing. The upper end of our guidance range incorporates stronger performance in APAC with a return to normal demand levels in China.

Non-GAAP gross profit margins ranging from 59.9% to 60.1% of revenues. Total non-GAAP operating expenses, ranging from 51.4% to 50.4% of revenues. Non-GAAP operating income ranging from 8.5% to 9.7% of revenues. We expect a GAAP tax rate of 21% and a non-GAAP tax rate of 20%. Please note that for the balance of the year in 2013, we will continue to use a constant non-GAAP tax rate of 20%, which we believe reflects the long-term average based on our tax structure and geographic distribution of revenue and profits.

Share count is expected to be an estimated 176 million diluted shares, exclusive of share repurchases. We expect GAAP EPS ranging from $0.00 to $0.02 per share and we expect non-GAAP EPS ranging from $0.13 to $0.15 per share.

I would now like to provide some directional information in regards to full year 2013 expectations. We expect to return to year-over-year growth in the second half of 2013 and we also expect to report year-over-year revenue growth for the full year 2013 given the following business drivers. We will have the ramped benefit of our new products in the second half which includes our CloudAXIS offering and the Group Series product portfolio. In Q2, we are already seeing more large, early-stage million dollar-plus deals in the pipeline, which we will be pursuing in Q3 and Q4. We look to increase sales productivity and sales capacity throughout the year. We will be marketing 3 variations of our platform, which includes a, on premise hardware deployments of RealPresence Platform; b, cloud-based service provider delivery of RealPresence Platform capabilities; and c, a new upcoming virtualized software release of the RealPresence Platform product set, coming in the second half of 2013. And lastly, we expect continued traction from our key alliance partners.

In that, we believe our competitive position improves through the year, as we bring a full portfolio to bear and support of the transition from hardware to software and cloud affording our customers the widest range of deployment options. Now, let me turn the call back over to Andy for closing comments.

Andrew M. Miller

Thank you, Eric. In summary, Polycom recorded very good financial results in Q1, including revenue at the high end of our expectations and EPS that exceeded our guidance range. Underpinning these results was growth in the Americas and strong performance in the UC Personal segment and services.

Our focus in Q1 was to continue with the introduction of our new products and services and to simplify and clarify market positioning related to various video deployment options, including via the cloud, virtualized solutions and Video-as-a-Service. Our high touch sales teams and channel partners have undergone a great deal of training to learn when each solution is most appropriate and how to help our customers grow their capabilities over time with Polycom.

Regardless of near term budget challenges, we believe our positioning is now much clearer with regard to the advantages of Polycom's solutions. We are confident that our high touch and channel account teams are now productively leveraging our assets to produce strong results over the long term.

Our strategic priorities for 2013 remain as follows: #1, we strive to increase both product and service revenue and believe there is continued opportunity to expand market share, given our size and experience, dedicated pure play focus and our best-in-class product portfolio. We will continue to pursue new product growth and revenue through our best-in-class partners and strategic alliances and to deliver virtualized core components of the RealPresence Platform.

#2, we continue to believe there is ample opportunity to expand margins over the long-term, given the continued evolution to products with higher gross margins like the new Group Series and CloudAXIS offerings. We are actively managing product service attachments and renewals and we'll continue to monitor the expenses.

#3, our product community and partner community has continued to evolve in its ability to sell complex UC&C solutions. We continue to look for partner-related revenue to grow in the latter half of 2013, driven in part by strategically significant alliances like Microsoft, AT&T and IBM, and with the help of leading global systems integrators. We are proud of our market position in this first quarter 2013 results. We expect to return to year-over-year growth in the second half of 2013 and we also expect to report year-over-year revenue growth for the full year 2013.

Thank you very much for your support of Polycom. Now, we would like to switch over to the audio portion of our call for Q&A. As we discussed earlier in the call, many of the statements we've made and will make during the Q&A period are forward-looking statements, which are subject to many risks and uncertainties.

Question-and-Answer Session

Operator

[Operator Instructions] And the first question comes from the line of Tim Long with BMO Capital Markets.

Timothy Long - BMO Capital Markets U.S.

Yes, maybe just a little bit more detail on public sector issues and maybe just a sense as to how long do you think this will last. Is this something we're going to be fighting for the rest of the year? That would be great.

Andrew M. Miller

Sure. This is Andy. Let me take that. When we say public sector, they're really 2 areas. The first is, government, education and medical, which is really state and local government, universities, K-12 and health care. The second is around federal, DOD civilian and intelligence agencies. So what we saw in Q2, and I don't think it was dissimilar to what other tech companies are seeing, was not a -- we do not see any losses from our larger transactions. What we saw was a delay in decision-making and thus, coming out of procurement. So our -- as we talked about the RealPresence Platform and our public sector results were all around the elongation of the sales cycle/deferred procurement. So we see that based upon our pipeline on the federal side returning to health in Q3 and the money flows from federal down to state and locals so I think it will take longer for the rebound in the state and local. But we do see confidence from the back half of '13, signaled by some early signs in Q2 of kind of working through that "sequestration" to an area where we're starting to see things move out of procurement. So kind of healthy paranoia to the positive around state and local in the back half.

Timothy Long - BMO Capital Markets U.S.

Okay. And just to follow-up on that, if I could. Are you seeing -- do you think this is happening across different product categories outside of your industry as well? Or do you think this may be, with the spending pressure and change in prioritization of where the funding is going right now?

Andrew M. Miller

No, I think we're a student here of other technology companies. I think everyone would cite public sector/federal as elongated sales challenge so I do not think it's unique to us. In fact, if you look at the Lync 2013 rollouts, if you look at the usage of video and the federal agencies, I think it's actually a -- fairly healthy, in terms of this hierarchy in terms of their procurement and TCO and ROI, so I think we feel very good about that, in fact.

Eric F. Brown

Yes. This is Eric. The thing I would add on is that, that we're starting to see some interesting deployments of telemedicine, for example, one of our first cloud access wins was indeed inside a health care provider, and it's an example of our new browser-based technology unlocking a used case that's directly relevant to public sector.

Operator

The next question comes from the line of Kent Schofield with Goldman Sachs.

Kent Schofield - Goldman Sachs Group Inc., Research Division

Just a follow-up on the last question. So you're seeing elongation in sales cycles in both federal and state local at this point, is that correct?

Andrew M. Miller

That is correct, yes.

Kent Schofield - Goldman Sachs Group Inc., Research Division

Okay, and then you're expecting an improvement in tandem in the second half of this year?

Andrew M. Miller

That is correct. We -- as you know, the significant buying season for the federal occurs in calendar Q3. As you know, we have a plethora and a best-in-class environment around the JEDEC certification as required. And I think we're very well-positioned in key programs, both in DOD and civilians. So we absolutely, through our pipeline and through intimacy with procurement and the public sector, feel confident of these transactions coming out of procurement into revenue in the back half, yes.

Kent Schofield - Goldman Sachs Group Inc., Research Division

Okay. Thanks for that clarification. And then on the UC Group side, thank you for the new metrics there, but can you talk a little bit more about what you're seeing between the legacy hardware and the new hardware and kind of the cadence that you're expecting going forward between those 2 -- the new products and the old?

Andrew M. Miller

Sure. The -- well, we don't call it the old. Many customers have chosen the HDX product line, which has been the Cadillac of our endpoint portfolio, and it has a quite a deployment inside most of our global 1000 customers. So what we see is many of those customers continuing with the HDX Series. We also see greenfield opportunities deploying the net new Group 300, 500 and 700. But at the same time, we're also seeing key customers, some of which I've mentioned on the call, starting to deploy a mixed environment of both the HDX and the Group Series to take advantage of SVC, new user interface and some of the collaboration feature and functionality. So it's actually going exactly as planned, in terms of the transition, education, channel training and then certification. Certification is required, and the federal space around JEDEC. And as Eric stated, the metrics around Group Series are just about on target to what we expected. And again, there is a differentiation between existing customers that have quite a few HDXs and the greenfield that are adding the new Group Series.

Eric F. Brown

Yes. This is Eric. I would add on that. When we talked about the Group Series the first time, we said a rough metric for roughly 25% of the revenue coming from the new Group Series relative to some total of the group plus the HDX endpoints. So the Q1 snapshot is 16%. So there'll be some averaging throughout the year. So we're at the high level, we're tracking to that.

Operator

Your next question comes from the line of Mark Sue with RBC.

Eric F. Brown

Hi, Mark.

[Technical Difficulty]

Operator

The next question comes from the line of Jess Lubert with Wells Fargo.

Jess L. Lubert - Wells Fargo Securities, LLC, Research Division

I was hoping you could help us better understand how we should be thinking about gross margins going forward, as we've now seen you settle a little margin business and launch a number of new software-centric products, it should have benefited gross margins, but we haven't really seen that happen this far, and I realized there have been some mixed factors impacting margins this quarter. But it seems like even the previous 2 quarters when the platform business was strong, we didn't see the uplift, at least I would have expected. So I was hoping you could help us understand why we haven't seen more of a margin uplift in the past few quarters and how we should be thinking about the longer-term gross margin profile of the business beyond Q2. And maybe just as a follow-up on that, it sounds like the platform business was impacted by some of the public sector weakness. How do we think about that business going forward?

Eric F. Brown

Okay, so this is Eric. What I'll do is I'll take that in a couple of parts here. In terms of the gross profit margin profile, couple of comments. One, it's important to look at the gross profit margin of both our product line and our services line, and what you'll note is that they're both hovering around 60% right now. So in regards to product mix itself, that revenue mix would be a function of the voice relative to the infrastructure or UC Platform products, which have the highest gross profit percentage. I'll come back to the cause of change in the mix in just a moment. And the long-term improvement in the product profitability will be impacted as we start to scale and ramp via the software product. So we launched CloudAXIS right at the tail end of the first quarter. The revenue was negligible and we need that product to hit full stride. That will clearly ship an exceptionally high gross profit margin. It's a 100% owned IP. No embedded third party products or royalties. So we need to build the Software business with CloudAXIS and also the 800s and other products that may have come in the back half, notably the virtualized software RealPresence platform and that's an important add in the back half of the year. In regards to the mix that we saw. Again, public sector tends to have a higher concentration of the UC Platform products. We talked about how in U.S, our demand being a bit weak. Also, Canada demand was a bit weak in this quarter as well. Between those 2, they typically comprise roughly half of our overall platform revenues. And so softness in the public sector in the quarter did impact the mix.

Jess L. Lubert - Wells Fargo Securities, LLC, Research Division

And I know you mentioned there wasn't any change in pricing. It sounds like we're going to see more big deals as the year goes forward. Does that bring more pricing pressure into the mix? And is there any reason to believe that gross margins can get back into the low 60% range exiting the year? Or would you expect them to level off kind of right around 60%?

Eric F. Brown

Yes, we're not guiding for a significant increase in gross profit margin on a full year basis. So the -- that takes a bit more time, as I said, for the software products themselves to ramp. So that would be, in terms of managing those expectations, it's hard to respond to that.

Operator

Your next question comes from the line of Mike Latimore with Northland Capital.

Michael Latimore - Northland Capital Markets, Research Division

Just on China. Would you expect the environment in China to be sort of back to normal in the second quarter or sort of taking a step forward, but not clearly back to normal?

Andrew M. Miller

This is Andy, I'll take that one. I just actually returned from a week in China last week with our team, our key partners and our key customers. So I feel that China will normalize in Q2 and clearly, in the back half will return to the growth orientation that we expect. Now, we have a 54% market share in China. So the growth has to be tempered with the ability to grow into that share, of course. But clearly, from a macro perspective despite a slight decline in GDP, the China team feels very comfortable with normalization returning in Q2 and then very comfortable with our back half expectations. So I think the blip that we saw in the previous 2 quarters is now behind us.

Michael Latimore - Northland Capital Markets, Research Division

Yes, and on the maintenance attachment rate, what was it in the quarter and maybe what is it sort of a year ago, I would say?

Andrew M. Miller

I would say that the maintenance attach rates -- we feel that year-over-year they moved by single-digit percentages. We don't quote exact. Renewals stats, as we go through the year, we're looking to pick up something in the order of 15 or so points and that's a function of a variety of initiatives and mandatory first year maintenance attach and the implementation of a series of new systems in collaboration with ServiceSource, our partner, to ensure that as we see standalone maintenance renewals that are being identified and parsed out to our partner community well in advance and so, there's a lot of operational work that we're pursuing that leads to an expectation for increased maintenance renewal rates over the course of 2013.

Operator

Your next question comes from the line of Amitabh Passi.

Chelsea Shi - UBS Investment Bank, Research Division

This is actually Chelsea Shi on behalf of Amitabh. So, just a follow-up a little bit on the China question, can you share some colors on the linearity getting into March quarter? Did you see any kind of demand pickup after the Chinese New Year or this is more looking into the later part of the June quarter to see the demands really normalize in this market?

Andrew M. Miller

Well, I think the -- I won't get into kind of what happened right post Chinese New Year's or with March. I think the quarter progressed as expected with fairly normalized linearity in terms of rest of company in China. I think what we're focused on is pipeline. We're focused on win rates and we're focused on large deal transactions. We see that, as I said before, becoming back to normal levels in Q2 and we actually see a very healthy pipeline and a very positive competitive dynamic with our market share and brand in China. So I think I would just leave that one that normalization back to Q2 and then a healthy growth trajectory as we go into the back half of the year with expected linearity.

Chelsea Shi - UBS Investment Bank, Research Division

Okay, got you. And also a quick one on the CloudAXIS Suite. It definitely see some tractions there, but could you help us understand better in terms of how the pricing model is? And going forward, will the company provide some kind of metrics to help us understand how this product is ramping up?

Eric F. Brown

Sure. This is Eric. I'll respond to that. We won't necessarily report individual product lines, but we will speak to, for example, aggregated results, say, for the Group Series, and also a collection of software products. So CloudAXIS would be included in that along with 800s, Content Share Suite and other products as we move through the year. But what you do think about CloudAXIS is as following: It requires the installation, or prior installation of the RealPresence Platform and so we might sell $1 worth of CloudAXIS so it can very well pull with it $4 to $5 worth of underlying RealPresence Platform. And so, to just measure the CloudAXIS component by itself is not necessarily the complete story. You will see us in Q2 bringing to the market CloudAXIS bundles for greenfield accounts, CloudAXIS 100 and CloudAXIS 500 bundles. An all-in bundle that includes RealPresence Platform plus CloudAXIS for either 100 users or up to 500 users and the pricing all-in will be compelling when measured on a per user per month basis. And so, that's really the approach that we're going to take in regards to go-to-market for CloudAXIS.

Operator

Our last question comes from the line of Mark Sue with RBC.

Mark Sue - RBC Capital Markets, LLC, Research Division

Gentlemen, if I could just ask the thoughts on the back half return to growth, like to share some of the additional proof points as it relates to -- in the inclination as a project growth backlog, how does that -- is that at least pointing in the right way so it's not just optimism on our part for the second half of the year?

Eric F. Brown

Sure. This is Eric. Andy and I will tag team it. But I would say that we did comment specifically on what we're seeing thus far in the Q2 pipeline. So we opened the quarter with good coverage ratios and a larger number of million-plus dollar transactions relative to where it had been before. These won't necessarily close in Q2, but they bode well for Q3 and Q4, so that's 1 data point. The other data point is we're doing better in regards to the performance of our Services business, our take rate on Elite Services, our premium price maintenance. That is picking up and that is accretive for both revenue and margin. We hit the full stride of the product cycle. So the Group Series 300, 500, 700 are now out. They're in the hands of partners and demo centers and undergoing certification with multiple end-users. And so, the back half of the year represents a full product opportunity for the Group Series.

Mark Sue - RBC Capital Markets, LLC, Research Division

Just the -- Eric, your backlog, is that, the way you define it -- is that thing shippable in 90 days or 180 days? Just for a background.

Eric F. Brown

Well, I'm not sure if I refer to backlog, but rather, kind of coverage ratios. So we look at 2 different metrics. Coverage ratio's for what we observe in our sales forecasting system. And as we open a quarter, we're obviously focused on transactions that have a targeted close date within the quarter. Backlog could represent items that ship in the next 90 days or perhaps the next 180 days. It depends really on what the product is and the desired delivery timing. And so that has a slightly more open time horizon relative to how we forecast within the quarter.

Andrew M. Miller

Okay. I think we're concluded with Q&A. So in closing, I'd like to thank everyone in the call for their continued support of Polycom, and we look forward to speaking with you again at the -- same time, next quarter. Have a good day. Thank you.

Operator

That does conclude the conference call for today. We thank you for your participation and ask you to please disconnect your lines.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Polycom Management Discusses Q1 2013 Results - Earnings Call Transcript
This Transcript
All Transcripts