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Polycom Inc. (NASDAQ:PLCM)

Q4 2013 Earnings Conference Call

January 22, 2013 05:00 PM ET

Executives

Laura Graves - VP of IR

Peter Leav - President and CEO

Eric Brown - COO and CFO

Analysts

Kent Schofield - Goldman Sachs

Kim Watkins - Citigroup

Ryan MacDonald - Northland Securities

Tavis McCourt - Raymond James

Tim Long - BMP Capital Markets

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Polycom's Fourth Quarter 2013 Financial Results Conference Call. During the presentation our participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. At that time if you have a question (Operator Instructions). As a reminder this conference is being recorded, Wednesday, January 22, 2014. I would now like to turn the conference over to Laura Graves. Please go ahead.

Laura Graves

Thank you, operator. Good afternoon, and welcome to the Polycom’s Fourth Quarter 2013 Financial Results Conference Call. I'm Laura Graves, Polycom's Vice President of Investor Relations. And here with me today are Peter Leav, President and Chief Executive Officer; and Eric Brown, Chief Operating Officer and Chief Financial Officer.

Today's press release and the accompanying slide presentation can be found at investor.polycom.com. Investors and other interested parties should refer to these materials for additional supplemental information. These materials and a replay of this conference call will be maintained on our website for up to three months. We will be making forward-looking statements on this call and during Q&A, including statements related to executive leadership, our strategy and future plans, opportunities, industry trends and projections, product delivery, guidance and our expectations regarding future financial and company performance and delivering shareholder value.

Each of these is subject to risks and uncertainties that could cause actual results to differ materially from our expectations. We discuss a number of the business risks that could cause our actual results to differ materially, in Polycom's SEC reports, including our most recently filed quarterly report on Form 10-Q for the quarter ended September 30, 2013. Any forward-looking statements must be considered in the context of such risks and uncertainties.

We will be presenting both GAAP and non-GAAP financial measures today. Please refer to the reconciliation of GAAP to non-GAAP financial measures as provided 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 referenced specifications are not guaranteed and will be delivered on a when-and-if-available basis.

Now to begin commentary on our Q4 2013 financial results, let me turn the call over to Polycom's President and CEO, Peter. Peter Leav, welcome.

Peter Leav

Thank you, Laura. I am incredibly excited to be at Polycom, and I look forward to today’s earnings call and the opportunity to address the investment community. 2013 was the year of transition which resulted in several challenges for our company. On behalf of the board, the management team and everyone here at Polycom; thank you for your support and commitment. I would also like to thank Kevin Parker for serving as our interim CEO prior to my arrival, and for beginning to implement an exceptionally sound process to examine our business.

I spent these first seven weeks meeting with and listening to our team, key customers and top partners. I observed the year-end closed process and lead the finalization of our planning activities for 2014. As I continue to learn, it is clear that we have a great opportunity to become more strategic and focus on making decisions about where we will win, to determine and support our most significant growth and profit contribution areas and to ensure we are aligned as a company. Our decisions will be correlated to our desired financial performance.

Increasing operating margins will be the number one financial priority for Polycom in 2014. I would like to share with you what I have learned since joining Polycom. First Polycom has many attributes. Polycom is a superb global brand, has strong balance sheet, a vast part of ecosystem and a loyal and growing customer base that appreciates the value that Polycom brings as a trusted partner and is dedicated to their success. We have the broadest product portfolio in the industry including many new offerings over the past 12 to 18 months, and we are extremely well positioned to capture the largest revenue opportunities in this industry.

Polycom’s technology suite provides competitive differentiation in voice, video and content collaboration as a true solutions provider. I am also impressed with our team and the devotion and commitment that our employees have to our customers and partners and to our company.

Next, we must continue to focus on the markets transition. This is an industry that is not alone in this transformation from hardware to software and cloud delivery of technology. We experienced a similar transition scenario during my career at NCR Corporation. It took a bit of time that we evolved our company from the provider of primarily hardware to a solutions company, that as services lead, software driven and hardware enabled. I envision similar opportunity for Polycom, recognizing the tough strategic and operational decisions this will require and I am prepared to lead the team to make them.

We are evaluating every aspect of our business on a return on investment and operating margin contribution basis, and we are working as a team to prioritize those areas that produce the best value for our customers and returns for shareholders. This will be accomplished by driving profitability and growth while reducing operating expenses as a percentage of overall revenue. Based upon these insights, the team and I have rolled out a strategic framework to bring guiding principles to our decision making process and ensure the necessary alignment to drive results.

Polycom’s four strategic pillars are as follows. Drive profitable growth. Winning is not binary, it’s in growth versus profit. We need to do both and to prioritize the growth opportunities within Polycom as well as the accretive opportunities to expand our offerings and market presence through adjacencies. Polycom has the broadest portfolio available in the market today and it is based up on open standards and interoperability which continues to differentiate Polycom’s solution suite.

There are real pockets of opportunity within Polycom. An example of this is UC Personal Devices, which grew again in Q4 at 33% on a year-over-year basis driven by open SIP and Lync-enabled handsets. Other areas for potential access to accelerate our growth include New Group Series, Cloud delivered video, our portfolio of content collaboration offerings and certainly our services business which continues to be a differentiator for our company.

Second, we must optimize our cost-structure. Going forward we are putting a much greater focus on fully understanding our expenditures removing cost from the business and re-aligning and recycling spending toward initiatives that will improve returns. Examples of this include our focus on real estate and cost reduction value engineering in the supply chain when the team is hard at work and I see real opportunity. Optimizing our cost structure is not simply cost cutting. It’s about business wining, decision making and determining the appropriate expense plan aligned with the realities of our business and the market.

Third, lead customer success. Understanding our customer’s business objectives and ensuring we deliver differentiated value is a fundamental trend at Polycom. From development to go to market, through our part of ecosystem we focus on being leaders in our space and driving success for our customers, and the ability to transform their business for the better. For example, at Evelina London Children's Hospital, cardiologist there are Group 500 video series with an Ultrasound card to transmit clear diagnostic data and images in full high-definition giving sick children access to leading specialists within minutes instead of hours, meaning much faster critical care. I have become involved with several key customers thus far and continue to be delighted with our ability to drive productivity, cost savings, and help our customers bring value to their customers using Polycom solutions.

Fourth, build a culture of one winning team with integrity as the foundation. This mindset is being cascaded throughout the organization. The need to align and have a clear gauge on how we win together is being very well received within our company. It is clear that we will always do so ethically and with integrity as nonnegotiable. I have become more enthusiastic everyday about our company. I firmly believe that 2014 will mark the beginning of a transformation for Polycom resulting in a very positive outcome for our customers, employees, partners and investors. With all that said, let me briefly discuss our Q4 financial results and then turn the call over to Eric for details.

Polycom reported revenue of $348 million in the fourth quarter of 2013. Results were as we expected in each geographic segment. Our UC Personal Devices and Services business posted year-over-year revenue growth at 33% and 6% respectively. UC platform also saw solid results in the fourth quarter. Non-GAAP operating margins were 9.8% in the fourth quarter of 2013 versus 7.7% in the previous quarter. Non-GAAP earnings per share were $0.16. Finally, Polycom repurchased 35.4 million shares in Q4 2013 as part of its return to capital program which I fully supported.

Last, it has become clear that our expenses are not fully aligned to our current revenue and gross margin profile. To put Polycom back on a path with a better operating performance we are taking several actions to reduce our expenses. We have made the decision to reduce our global workforce by approximately 6% and to reduce our leased office space. While these are very difficult decisions to make, they are necessary to better align expenses to revenue, and to reallocate cost towards those areas with better returns.

We are also taking additional measures that include improved product lifecycle management and a greater focus on cost-reduction value engineering in our supply chain. These actions will take some time but are necessary. As the management team, we are focused, aligned and dedicated to making and carrying out the right decisions for our company, our employees, and our shareholders.

Eric, let me now turn it over to you for more detailed financial results and guidance.

Eric Brown

Thank you, Peter. Beginning with top line revenue, Polycom generated $348 million in Q4 2013, up 3% sequentially and slightly above our guidance range of $336 million to $346 million. Each of our three regions was in line with what we expected overall. The Americas region which represented 49% of total revenue was down 4% sequentially and down 3% year-over-year as we expected. The U.S. federal business remained less predictable with many programs still unfunded due to lack of longer term budget uncertainty. Our new region which represented 26% of revenue was up 11% sequentially and down 4.5% year-over-year. We saw sequential growth across most of EMEA. Russia did not grow sequentially. Our Asia-Pacific region representing 25% of revenue was up 11% sequentially and up 4% year-over-year. Every country, with the exception of South Korea, was up sequentially and China grew 13% year-over-year. In terms of product categories UC Personal devices significantly outperform the rest of the business by growing 33% year-over-year and 9% sequentially driven by growth in open SIP handsets and Lync enabled devices.

UC group system’s revenues were down 1% sequentially and down 8% year-over-year. UC group system’s revenues were adversely impacted by the reduction in revenue from the Cisco conference phone OEM deal. UC platform revenues were up 16% sequentially and flat year-over-year. New group series product revenue was 24.9 million, representing 26% of total room, video end point product revenue in Q4 versus 20% in Q3 2013, 19% in Q2 2013 and 16% in Q1 2013. We met our 25% end of year target mix for group series revenue that we set at the start of 2013.

In Q4, 90 customers selected our RealPresence CloudAXIS software solution, bringing the total customer count to approximately 200 in the first year since the launch of CloudAXIS. Our worldwide services business continue to perform well growing 3% sequentially and 6% year-over-year. We continue to improve our services attached and renewal rates, and we are seeing good traction with our premiums in core offerings. We improved our renewal base by 10 percentage point year-over-year in Q4. As previously discussed we also launched a new managed service and see a long term opportunity with our enterprise customers.

Moving to the P&L. Non-GAAP gross profit margins for the fourth quarter were 58.8%, down 0.2 percentage points from the prior quarter and down 1.1 percentage points from Q4 last year. The change in gross profit margin was primarily attributable to a higher mix of UC personal devices revenue. Q4 non-GAAP operating expense was 171 million or 49.1% of net revenues. This compares to 51.4% of net revenues in Q3 2013 and 49.9% of net revenues in Q4 last year. Q4 non-GAAP operating income was 34 million or 9.8% of net revenues. This compares to 7.7% of net revenues in Q3 2013 and 10% of net revenues in Q4 last year. Increasing operating margin is the number one financial priority for Polycom in 2014.

Q4 non-GAAP diluted EPS was $0.16 compared to $0.11 in Q3 2013 and $0.17 in Q4 last year. On a GAAP basis, Q4 diluted EPS was at loss of $0.01 per share compared to a net loss per share of $0.14 in Q3 2013 and income per share of $0.01 in Q4 last year.

Turning to the balance sheet. We exited the fourth quarter with total cash and investments of $584 million, following the execution of our $400 million return of capital program. 32% of this cash and investment balance is onshore. Polycom generated 50 million in operating cash flow in the quarter on the basis of good working capital performance and 168 million in operating cash flow on a trailing 12-month basis.

During Q4, share repurchases totaled 400 million or 35.4 million shares including 285 million or 27.4 million shares through a tender offered and $115 million through an accelerated share repurchase program that resulted in an initial repurchase of 8 million shares with the balance of shares to be delivered by June 2014.

Polycom’s absolute share count as of December 31, 2013 was 135.2 million shares compared to 175.3 million shares on December 31, 2012. Polycom’s weighted average diluted share count on December 31, 2013 was 155.3 million shares. Additional financial and operating information is available in our press release, and the supplemental materials on our website.

Now moving on to guidance for Q1 2014. Please note that the financial guidance provided on this call is valid as of today only, and Polycom will not provide updates to this guidance regardless of changes that may occur in the future. For 2014, we are assuming a constant non-GAAP tax rate of 20% for each of the quarter, which we believe reflects the long-term average based upon our tax structure and geographic distribution of revenue and profits.

The key considerations for our Q1 2014 guidance include the following; in the Americas, we are anticipating a more rapid wind down on the Cisco conference phone OEM arrangement resulting in only minimal revenue in Q1 2014; worldwide, we expect to continue strength in the UC Personal segment, which negatively impacts Q1 gross profit margins.

For Q1 2014 guidance we expect the following; revenue ranging from 322 million to 332 million, non-GAAP gross profit margin ranging from 58.5$ to 58.9% of revenues. Total non-GAAP operating revenues ranging from 50.65 to 50.0% of revenues, non-GAAP operating income margin ranging from 7.9% to 8.9%, share count for non-GAAP earnings per share is expected to be an estimated $142 million diluted share. We expect non-GAAP EPS ranging from $0.13 to $0.15 per share and we expect GAAP EPS to range from a loss of $.015 to $0.13 per share based upon a basic share count of 137 million. Please note that our guidance for Q1 2014 includes a GAAP restructuring charge of approximately $30 million relating to downsizing our real-estate footprint as well as the reduction of approximately 6% of our physicians worldwide. The effect of these savings is reflected in our non-GAAP Q1 guidance. These actions better line cost with our revenue and gross margin profile setting the stage for operating margin expansion in 2014.

The actions announced today will take very maximum time to fully implement in 2014. We’re not providing guidance for the full year 2014. However based upon current consensus estimates for 2014 we suggest that analyst do not make changes to their full models at this time. Now I will turn the call back over to Peter.

Peter Leav

In summary we’re pleased with our Q4 financial results and the opportunities ahead of us in 2014. We’re taking a thoughtful strategic and opportunistic view of our business to identify opportunities for improved revenue and operating performance. We look forward to sharing our progress with you throughout the year and we appreciate your support and commitment to Polycom. Operator we’re now ready to begin the Q&A session of the call.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And our first question is from the line of Kent Schofield from Goldman Sachs. Please proceed.

Kent Schofield - Goldman Sachs

Great, thank you, and welcome, Peter. Thank you for the detail and your outlook there. First question, can you talk a little bit about UC personal strength? It seems like on a year-on year-basis that sort of growth that we saw in December might be a little bit unsustainable. But if you could just talk a little bit about what's driving that, how we should think about it into 2014, especially as we get to some more difficult comps. And then secondly, on the 6% workforce reduction, I understand that you are not talking about timing at this point. Could you help us understand a little bit, if there is a skewing one way or the other in terms of how you think about either sales and marketing, R&D, in terms of how we think about our modeling going out into 2014?

Peter Leav

Kent I appreciate the comments and I appreciate both questions. I will touch on the first in some detail based upon my seven weeks and I will quickly touch on the second and then hand it over to Eric to give a little bit more color. So as it relates to UC Personal devices it is clear to me and becoming clear I think to the market that the telephony space is changing and I had to spend quite a bit of time with customers in these first few weeks. And one thing that has become clear is that the traditional players and then we used to call the PBX players the traditional players I think there an element of transition that voice over IP has become perhaps way traditional as well is a market that some significant transition as the desktop software players most notably Lync and Microsoft are taking advantage and opportunistically using the benefit of the transition and customers are very focused on the value that the software package that they have will bring to them and the cost components that coincide with that and we become a larger component of that entity as it grows and certainly the Lync relationship has been key to what degree is ongoing and how considerably impactful that will continue to be for our company is something that we continue to look at, but it’s a very, very solid business for us and obviously has been for the last few quarters and we expect that to continue for a period of time.

On the second page I will just make a few quick comments that we are looking at the reduction as it relates to ensuring that expenses are commensurate with both our gross margin profile as well our declining -- I am sorry increasing expenses over the last several years. So as we look at this we saw a need to make an adjustment and do it preemptively as we started the year. The bulk will come in the form of research and development and sales and marketing organizations, but it will show some impact in different parts of the organization as we look to be somewhat balanced. But I will let Eric add some more color on that front.

Eric Brown

In regards to the restructuring first of all in terms of timing the notifications are initiated today, however need not all the cost will come out of our P&L segment today. This will be done over the next 2.5 quarters or so with the bulk being completed by the end of Q1. The two elements of the restructuring pertain to the workforce reduction at a high-level, it’s a third out of R&D, a third out of sales and marketing and the third out of G&A and cost of goods. The real estate restructuring action will also take some time in some cases we are exiting whole facilities in other cases we are downsizing facilities and so that takes time as well. The bulk of the restructuring charge we would expect to book in Q1, 30 million out of 34 million at the midpoint but again there will be some ratable element to how that plays out.

Peter Leav

Operator, we are ready for the next question please.

Operator

Absolutely. Our next question comes from line of Kim Watkins with Citi. Please proceed.

Kim Watkins - Citigroup

Thanks so much, and welcome, Peter. First question, I guess is just on the restructuring. Wanted to see if you had any thoughts around where we could see operating margins go longer term? And to that end, if you just quantify the savings you expect from that program? And somewhat related to that in UC personal strength that Kent asked about, wondered if there's any way to improve the gross margins on that business, so when we continue to see strength, we can come through at a better margin level?

Eric Brown

So, first of all I just want to reemphasize the fact that in the Q1 non-GAAP guidance that we just gave, we have already incorporated the benefits of the cost reduction program. In terms of the overall savings from the restructuring activities the real stay cost of our net reduction, the headcount reduction is gross. There are some net offsets to that as we recalibrate investment dollars in other higher potential areas. We are not commenting on full year guidance overall specifically but we did the confirmation that the current consensus is smaller for 2014 is in pretty good alignment with what we are expecting for the full year overall.

Peter Leav

Great, its Peter. I will touch quickly again as UC Personal devices Kevin I appreciate the question. We are looking at opportunities to ensure that decisions we make are accretive from a margin and operating margin perspective both gross margin and operating margins are at the top of my list to the team at this point. So, that’s a rally cry throughout the organization. I don’t have detail beyond that. Certainly as we see this business continue to grow for us and obviously it’s becoming a more significant contributor. It is something that we are looking at from a variety of vantage points and probably will continue to be an area that we make investments in both from a hard work perspective and potentially looking at what we can do as we extend our reach so to speak from a global perspective as well.

Kim Watkins - Citigroup

Okay, thanks. Can I just probe and follow-up on Eric's response to the OpEx reduction? I understand it's in Q1 operating margin guidance already, but I also heard you say that the actions aren't going to be completed by the end of Q1. So, are you suggesting I mean, I kind of guess hand in glove with reaffirming Street numbers for the year, you're suggesting that you expect operating margins to increase then in second quarter and throughout the year? Am I understanding that correctly?

Eric Brown

We do expect operating margins to improve as we move through the year, through the quarters. The overall restructuring activities will not be completed until Q3 of 2014, so there is a bit of -- with regards to how they have played out. The bulk of the activities will be completed as of the end of Q1 2014.

Kim Watkins - Citigroup

Okay, thank you. That’s helpful.

Peter Leav

Thank you, Kim. Operator next question please.

Operator

Next question comes from the line of Mike Latimore from Northland Securities. Please proceed.

Ryan MacDonald - Northland Securities

Hi, this is Ryan MacDonald on for Mike Latimore. I wanted to start within UC personal devices; can you quantify at all what that growth rate for Lync-related devices was during the quarter?

Eric Brown

This is Eric. We report partner influenced revenue for Microsoft specifically and the overall business for Microsoft was up small double-digits year-over-year, not all the products that are Microsoft I think influenced our voice but certainly the bulk of them are. And from what we can tell we have roughly 70% share at this point time and we can able the handsets and so it’s definitely an important driver in terms of the overall UC personal results.

Peter Leav

And to be clear we don’t breakout between open chip handsets and the Microsoft Lync handsets and there is a lot of our personal device products are in there but we do appreciate the question. As we have been for past quarters trending right along with Microsoft on the growth off let.

Ryan MacDonald - Northland Securities

Okay. And then also on any particular verticals that really stood out strong or weak during the quarter?

Peter Leav

If you look at Q4 year-over-year, the overall mix verticals was roughly the same compared to Q4 last year with the exception that we did see some weakening in governments, so several points down year-over-year in government and that was offset by several point pickup in financial services.

Ryan MacDonald - Northland Securities

Great. Thank you.

Peter Leav

Thank you very much.

Operator

(Operator Instructions). And we have a question from the line of Tavis McCourt with Raymond James. Please proceed.

Tavis McCourt - Raymond James

Hello, guys. This is Tavis. The data points you gave on 200 enterprise customers for the RealPresence cloud access, is that the on-premise version or the cloud-based version of that? And with that, are there any products still left to be launched? And general availability from the Analyst Day back in late 2012, or have all of them basically been birthed at this point?

Peter Leav

Hi, Tavis, with respect to cloud access is the number of customers reported to date is are on premise, cloud access is a software upgrade option to the RealPresence Platform hardware which is a non-premise deployed application.

Tavis McCourt - Raymond James

Got you. And then can you comment a little bit on capital spending plans this year? And acquisitions? It seems like there is still some US cash left. Eric is that kind of the minimum level you would like to run the business or is there still a thought of some acquisition in the capital use plan?

Eric Brown

Yes. In term of the ending cash investment have positioned with about 584 million, up 32% of that is onshore with the balance offshore. We’ve talked in the past of about making in well over $100 million of minimum cash level and onshore. So, there is some modest access cash there regards to CapEx plan, we were looking to bring down our internal capital spending and so we’ve been running assets to get to the 12 million a quarter to date and so we don’t expect any kind of significant upward movement from there if anything sideways too went down.

And regards to M&A to the extent that there is access cash either onshore or offshore the things that we consider are smaller scale and I think that that would allow us to accelerate our key initiative specifically conversion to more of a software led model, a ratable model in terms of manage services cloud delivery but certainly we’re much more focused on the organic opportunities in hand managing the cost structure and driving more profitable growth under the areas like UC Personal where we are considerable tailwinds.

Tavis McCourt - Raymond James

Thank you.

Operator

(Operator Instructions).

Laura Graves

Peter, well is waiting for that, why don’t we go ahead. And I think Tavis, I would take a note for you, you also asked a question about what is software version of our RealPresence Platform would be available and so Peter or Eric, one of you, do you want to discuss what we have in beta and when things are going to sort of the…

Peter Leav

Sure. Tavis, very good to meet you and this is a big topic for the company at a broad scale as well as it relates to software with our key piece -- software being a key component. General availability is there, so we are in that position today and it’s built into our 2014 plan. Obviously, we’ve got a focused insuring that we get some quick wins. But I just want to make sure that is clear additionally we’re looking to expand our presence as a video, as a service player and that’s something that the team is also focused on will build that plan over the course of the year to look for expansion as we diversify our portfolio a bit.

Laura Graves

Operator, are there any more questions at this time.

Operator

There are no further questions registered at this time. Pardon me. We have a follow up question from the line of Kim Watkins from Citi. Please proceed.

Kim Watkins - Citigroup

Thanks. I thought I would chime in with a couple others on my mind. Wanted to see if we could dig into some of the geographic trends that we saw. We've been talking for a couple quarters now about APAC and China being weak, specifically drill into what caused the upside or the sequential strength in APAC relative to what you been experiencing in China and India. And the same line of questioning with EMEA, although that's been pretty much as you expected, is my understanding. But it seems a little bit strong this quarter.

Peter Leav

Kim, how are you? Again, it’s Peter. I’m going to just give you a broad gauge and I’ll do Asia first and then we’ll spend some time on EMEA and Eric will probably add some additional detail.

So, an Asia perspective, we actually experienced stronger results in China in Q4 with good year-over-year growth and that was as expected, we have a China team does a very good job of telling us what will happen and in this case they did once again.

In APAC across the region, just some highlights Japan, and Australia, New Zealand, China as I mentioned all posted double digit growth quarter-over-quarter. So, that was a positive story. Europe was a bit mix. We have a very tenured and very senor team there, but generally speaking it was a good story in the sense that we saw sequential growth. Russia is quite now and I think it is for many for many companies and so she is probably a big part of that but the UK is doing well and we’re seeing it coming back and that’s a good thing, this EIS states as well, and we’ve really done well in the Middle East Africa and I’m very proud of that team as I guess to understand our business there that team has had a very solid series of quarters and a good performance once again.

Eric Brown

The only thing I would add there India is down pretty sharply year-over-year on a player basis is off about 50% and we’ve talked about the currency situation there with the significant weakening of their local currency. And in Americas, the outlook in Federal still a bit uncertain due lack of long term budgeting, so there’re projects under review but if the lack of permitted funding visibility is making a bit more difficult to have those funds actually dropped down to be attached to the pending projects. So we’re mindful of that factor in the Americas.

Kim Watkins - Citigroup

Okay. Thanks. That's helpful, and then one last question from me, which is you mentioned that the Cisco wind down is a factor in Q1 guidance. Can you quantify that?

Peter Leav

We went into the fourth quarter here expecting that we would have something on the order of call $5 million to $7 million with CISCO phone OEM revenue in Q1. Right now, we’re forecasting maybe 1 perhaps 2 million, so it’s about $5 million delta in terms of our Q1 expectations compared to 90 days ago - the principal cause of change that we see is we look at where we put our Q1 revenue midpoint guidance.

Laura Graves

To be quite fair though it was stronger in Q4, it was very strong in Q4 in CISCO revenue.

Kim Watkins - Citigroup

Okay thank you.

Operator

And we have a follow-up question from the line of the Ryan MacDonald with Northland Securities. Please proceed.

Ryan MacDonald - Northland Securities

I just had a couple of housekeeping questions. First, can you go over again, what was the guidance given for non-GAAP operating income for the first quarter?

Eric Brown

The guidance for non-GAAP operating margins for Q1 is 7.9% to 8.9%.

Ryan MacDonald - Northland Securities

Okay and then could you provide us with what the employee headcount was at the end of as of December 31 was?

Eric Brown

Sure it was 3774 total headcount.

Ryan MacDonald - Northland Securities

Okay thank you very much.

Laura Graves

You’re welcome. And to all the listeners on the line, we do have the slides that are available also on the website that provided some of stated therefore you if you missed it in our call. Operator any other calls or questions in the queue at this time?

Operator

We currently have one more question registered from the line of Tim Long with BMP Capital Markets. Please proceed.

Tim Long - BMP Capital Markets

Hello, thank you. Just a few from me. First, maybe Eric, if you can give us a sense on some of the larger deal metrics in the quarter? Just curious to see if we've seen any movement in big deals. And then secondly, Peter, just curious on, take a step back on the overall video market, how you're looking at that and really curious as to what you think, really, about the infrastructure component of the market as we evolve to more cloud and software client-based models?

Eric Brown

This is Eric. I will take the first portion of that. In regards to the deal metrics for Q4 2013, we have nine transactions greater than $1 million, 26 between $0.5 million to $1 million, 94 between 250K to 500K and 450 deals between 100K and 250K. As we look at the deal metrics, the deal count on a larger transaction is down a bit year-over-year and basically making up with the larger volume of smaller transactions on the year-over-year compare.

Tim Long - BMP Capital Markets

Okay, it’s helpful.

Peter Leav

So, it’s Peter. Let me talk a little bit about video categorically and again on still in a bit of learning mode, but it was a good thing generally to see UC Platform up sequentially and we were flat year-over-year. So obviously it’s a key profit contributor and it’s positive in general terms and we talked a bit about our RP et cetera. On the UC group side and I’ll bracket this as group video systems.

One of the things I think is of great value is to start with what the market tells us, what the market inform us as we make decisions and it appears as though in 2013 the industry/market was down roughly 5%. We were down as well and part of that have to do with the transition, HDX to group which Eric talked about and the team came through and delivered that exactly as they said they would at about 25%.

So, 2013 was I would say not stellar year for us as it results to market transition and our own performance within the confines of the changing market, changing markets are not bad things as long as we reap the benefit of the change. In 2014, we expect to see a bit of a reversal, we expect to see the markets start to come back, single digit growth and we are better prepared because this HDX to group series transition has in large measure occurred. Now it hadn’t gone full throttle related to the flow through of our revenue but most of the heavy lifting from an engineering standpoint has taken place, so that’s a positive thing, the market improving slightly is a positive thing. What’s not a positive thing is the fact that ASPs are slightly down and will need more volume. So we’ve built a growth number into our plan, our teams are keenly aware of that on all fronts and group video will be a big watch item but one that we see as an opportunity for us, within the confines of our categories. Now you ask additionally about video-as-a-service, we will see expanded coverage, we will be both through major service providers and our key partners, we will see the significant extension of our video-as-a-service offer, I believe there is also an opportunity to be a bigger content player in that sense but you’ll that start to take form as it’s been fairly modest for us. I don’t look at these as binary but I do look at these as somewhat delineated. Then they’re different markets in some ways today. So we will be players in both and we’re keeping a keen eye on both.

Tim Long - BMP Capital Markets

Okay, thank you.

Laura Graves

Thank you, Tim. Ladies and gentlemen I believe that is the last question that we have in the queue, I did want to remind you that Polycom will be at the Goldman Sachs Global Technology conference on February the 11th, Peter Leav and I will be there followed by the Morgan Stanley conference on March the 4th, Eric Brown and I will be there, and we look forward to seeing you then. Peter did you have a closing comment or anything.

Peter Leav

I did, Laura and thank you. I just wanted to say thank you for joining us today on the call, and thank you for your support of Polycom; we look forward to speaking with several of you over the course of the next series of quarters and thank you again for your time today.

Operator

Ladies and gentlemen, that does conclude the conference call for today, we thank you for your pitch in and ask you to please disconnect your line.

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