Polycom, Inc. (PLCM) Q1 2014 Earnings Conference Call April 23, 2014 5:00 PM ET
Executives
Laura Graves - IR
Peter A. Leav - President and CEO
Laura J. Durr - Interim CFO
Analysts
Kent Schofield - Goldman Sachs
Mike Latimore - Northland Capital Markets
Kimberly Watkins - Citi
Amitabh Passi - UBS
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the Polycom First Quarter 2014 Financial Results Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to Laura Graves, Vice President of Investor Relations. Please go ahead.
Laura Graves
Thank you, operator. Good afternoon, everyone, and welcome to the conference call for Polycom's first quarter 2014 financial results. I am Laura Graves and here with me today are Peter Leav, President and Chief Executive Officer, and Laura Durr, Chief Accounting Officer and Interim CFO.
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 Web-site 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, areas of focus and future plans, priorities and initiatives, future opportunities, industry trends and projections, product offerings, guidance and our expectations regarding future financial and Company performance in 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 may cause our actual results to differ materially in Polycom's SEC reports, including our most recently filed annual report on Form 10-K for the year ended December 31, 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 here today. Please refer to our reconciliation of GAAP to non-GAAP financial measures in today's earnings release, which is posted on our Web-site. 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 cancellation. Products and referenced specifications are not guaranteed and will be delivered on a when-and-if-available basis.
To begin commentary on our Q1 2014 financial results, I'd like to turn the call over to Polycom's President and CEO, Peter Leav. Peter?
Peter A. Leav
Thank you, Laura. Polycom reported solid overall revenue of $329 million in the first quarter of 2014, including 3% year-over-year growth in UC Platform and 15% year-over-year growth in UC Personal Devices. Polycom's UC Platform category includes Polycom RealPresence hardware and software infrastructure solutions. UC Personal Devices includes OpenStep and Microsoft Lync enabled voice solutions.
Non-GAAP operating margins were 10.1% in Q1 2014, a marked improvement when compared to 8.8% in Q1 2013 on revenue of $339 million. Increase in operating margins is the number one financial priority for Polycom in 2014. I am pleased with the laser focus and early traction that the team has shown in this regard. Non-GAAP earnings per share were $0.18 and included a $0.01 benefit attributable to interest and other income and expense. Non-GAAP earnings per share grew almost 40% versus Q1 2013.
Our Company is poised for continued success by serving our customers and making them successful. We continue to prioritize efforts to improve operating margins through informed strategic decisions and enhanced operational performance. We are educating and guiding our sales team and channel partners to prioritize Polycom's expanded portfolio with a solutions oriented approach. We remain steadfast in our drive to optimize Polycom's cost structure while continuing to invest in accretive long-term areas of growth like platform software, services and video content management, and we are committed to our voice business from the desktop to the conference room.
Polycom has a compelling global brand, outstanding balance sheet and extensive partner and customer ecosystem and a robust product portfolio. We are receiving solid external validation from customers about our strategic direction to lead the market with open standards voice, video and content solutions. Polycom's broad portfolio of hardware, software and services combined with our strong ecosystem of partners provides unique differentiators that enable our customers to defy distance while increasing productivity and reducing costs. I am proud of Polycom's accomplishments this quarter. We are creating an environment of continuous improvement to exceed our customers' expectations, deliver on our commitments and provide value to our shareholders.
Now I would like to take a few minutes to highlight the value we bring to our customers and our opportunity to drive profitable growth. We received our first order for Polycom RealPresence One to our long-time partner Telstra in Australia for a customer in the public sector space. Polycom RealPresence One is a comprehensive offering that combines the complete RealPresence Platform with software endpoints and optimized services, all for a yearly subscription fee.
This win was strategically important to us because it provides our customers the flexibility to deploy multi-party voice, video and content sharing in a virtual environment with other IP applications. In this instance, Polycom RealPresence One was implemented to upgrade the customer's existing hardware video bridging platform to newer solutions in a purely virtualized environment. The customer is excited about simplified administration, reduced costs and an ability to plan more effectively.
The benefit to Polycom was our ability to upgrade the customer's environment with software and added services in a greatly shortened sales cycle. This win was margin accretive and certainly differentiates our Company. Not only do we have the opportunity to sell software solutions into our existing base, but we also have an opportunity to target the mid-market with this solution, resulting in incremental customers who have not used video and content collaboration solutions previously.
At a well-known bank in Africa, Polycom captured a significant win over the competition, even though the competition offered lower prices. We solved the customer's challenges with our interoperable, scalable and redundant solutions that included infrastructure, desktop phones, video room systems, immersive telepresence and services, highlighting our end to end solutions oriented approach.
Another win is at a company here in the U.S. focused on the full service semiconductor industry. Not only did we displaced our largest competitor with our new immersive telepresence solution, RealPresence Immersive Studio, the Polycom team was able to offer managed services and video content management for added value to the customer and a greater revenue opportunity for Polycom.
Finally the North Atlantic Treaty Organization or NATO, which has rigorous requirements, combined with the need to communicate across a wide variety of legacy systems from multiple vendors, it is gratifying to say that Polycom security and open standards-based interoperability meet the stringer requirement of NATO. We are proud to support them through a contract with our partner, SAIC. The winning spirit is alive and well at Polycom and we are leveraging our global footprint to drive new opportunities, like the ones I have highlighted today.
As I mentioned last quarter, we rolled out a strategic framework designed to optimize operational performance and drive growth in current and adjacent markets. Polycom's strategic pillars for 2014 are to drive profitable growth, optimize our cost structure, lead customer success, and build the culture of one winning team with integrity as a foundation. It is both exciting and gratifying to see our teams embrace and align around these pillars to deliver results.
Internal business activities in Q1 were focused on driving improvement in Polycom's operating performance. Specifically, we removed cost from the business and again to realign and recycle spending towards strategically important areas that will improve returns, initiatives like voice, software infrastructure and video content management. Our teams have been hard at work identifying areas for cost reduction and improvement. These areas include cost reduction value engineering, enhanced purchasing programs and a cross-functional project team that's focused on sales performance with improved strategies and deliverables.
In terms of operating expenses, we announced several cost reduction actions on our last quarterly conference call, including a 6% headcount reduction and lowering facilities cost. Optimizing our cost structure is not simply cost cutting, it is about discipline in decision-making and determining the appropriate expense plan aligned to the realities of our business and the overall market. We believe these activities will better enable us to capitalize on future growth opportunities and drive long-term operating leverage in our financial model.
In Q1, we also continued to support those areas of the business that we expect will deliver profitable growth for Polycom. Specifically there are four pockets of potential long-term growth that are collectively unique to Polycom. Number one, our next-generation RealPresence Group Series video portfolio. The Polycom RealPresence Group Series delivers breakthrough user experiences, broad interoperability and low total cost of ownership. With our latest software release in January, we are seeing a quicker than expected transition to the new Group Series product line. This will provide our customers with a new simplified user interface and greater scalability for multipoint conferences, while also driving higher gross margins for Polycom. The new Group Series accounted for 36% of total group video revenue in Q1 2014, up from 26% the prior quarter.
Number two, voice. The industry continues its unprecedented adoption of hosted voice solutions based upon OpenStep and Microsoft Lync, which is driving demand for our portfolio of desktop and conference phones. Polycom's enterprise voice products sold through our global partner network offer easy integration and a legendary voice quality and reliability that Polycom is known for. The UC Personal Device category continues to be Polycom's fastest growing product category. Given industry analyst estimates, we believe the voice market will have an 18% CAGR through 2016.
Third, voice, video and content bridging software. We are confident that Polycom RealPresence Platform solutions provide the highest interoperability, scalability and reliability compared to any other video infrastructure solution available today. Previously, the RealPresence Platform was only available as hardware. Today, the RealPresence Platform is available as software on either the RealPresence Platform Virtual Edition or as an annual subscription with RealPresence One. Both solutions combine RealPresence Platform software with endpoints and optimized services that are easy to deploy across the enterprise. These new software solutions create a highly profitable growth opportunity for Polycom.
And services is a fourth area of potential growth. The ever increasing range of collaboration technologies and applications requires ongoing maintenance and professional support by Polycom or one of our certified partners. These services range from network assessment to implementation to analytics and adoption services. Our best practices and experience in deploying video across the enterprise are critical to help our customers achieve success. Managed Services is another offering and provides our customers with a turnkey solution and is an incremental growth opportunity for Polycom.
Polycom has the most strategically relevant product portfolio for medium to large customers across the enterprise. We are expanding our market with new technology and business model offerings including video-as-a-service to reach enterprise branch offices and the small to medium-sized businesses environment. We are proud of our established global customer footprint and will continue to deliver solutions that meet the needs of our customers and are differentiated from the competition.
I have spent these first four and a half months meeting with and listening to our team, key customers around the world, and our partners. I am very proud of the Polycom team. We are off to a solid start in 2014. There is still much to do and accomplish and I look forward to an exciting future for our Company.
Now please allow me to welcome to the call Laura Durr, Polycom's Chief Accounting Officer and Interim CFO to share a detailed review of Polycom's financial performance in the first quarter. Laura?
Laura J. Durr
Thank you, Peter. Beginning with the top line, Polycom generated $329 million in revenue in Q1 2014, down 3% on a year-over-year basis, as anticipated and within our guidance range of $322 million to $332 million. The Americas region which represented 50% of total revenue was down 5% year-over-year. As previously discussed, we expected lower conference phone OEM revenue from Cisco as a result of their end of life of a product previously purchased from us. Excluding this impact, Americas revenue would have grown 1% year-over-year.
Our EMEA region, which represented 27% of total revenue, was flat on a year-over-year basis. We saw significant growth in the U.K. and Central Europe offsetting year-over-year declines in the Nordic region. Our Asia-Pacific region, representing 23% of revenue, was down 3% on a year-over-year basis. Within this region, Japan experienced a difficult year-over-year comparison due to a very strong quarter in Q1 2013. China was also down slightly compared to prior year results.
In terms of the product categories, inclusive of their service component, UC Group Systems revenues were down 8% year-over-year. Note that excluding the impact of lower conference phone OEM revenue from Cisco, UC Group Systems revenues would have been down 5% year-over-year. UC Personal Devices grew 15% year-over-year, driven by growth in OpenStep and Lync enabled devices for the hosted voice environment. UC Platform revenues were up 3% year-over-year. Separately, our services business grew 5% year-over-year.
Moving to the P&L, non-GAAP gross profit margins for the first quarter were 59.2%, down 0.7 percentage points from Q1 last year. The change in gross profit margin was primarily attributable to a higher mix of UC Personal Device revenue. Q1 non-GAAP operating expense was $161 million or 49.1% of revenues, as compared to 51% of revenues in Q1 2013. Q1 non-GAAP operating income was $33 million or 10.1% of revenues as compared to 8.8% of revenues in Q1 2013.
Q1 non-GAAP diluted EPS was $0.18 per share as compared to $0.13 per share in Q1 2013. Year-over-year, non-GAAP EPS improvement was driven by lower share count and improved operational performance. The better than expected performance was due to flaunt execution on operating margin improvement initiatives and a one-time $0.01 benefit from lower other expense. On a GAAP basis, Q1 diluted EPS was a loss of $0.03 per share as compared to net income of $0.01 per share in Q1 2013.
Turning to the balance sheet, we exited the first quarter with total cash and investments of $596 million, of which 39% is located onshore. Net of existing debt, total cash and investments were $349 million at the end of Q1. Polycom generated $19 million in operating cash flow in the quarter after the impact of payments associated with the restructuring actions and our year-end employee bonus payout.
Polycom is in the midst of an accelerated share repurchase program. Under the terms of the program, 115 million of common stock was repurchased by Polycom in Q4 2013, whereby we received an initial 8 million shares. We expect the program to be completed by June 30, 2014, at which time we anticipate receiving approximately 1.5 million additional shares based upon our share price since the inception of the program. No share repurchases were recorded in Q1 2014 due to the mechanics of this program.
Polycom's total shares outstanding as of March 31, 2014 were 138 million shares compared to 175 million shares on March 31, 2013, which is a reduction in shares outstanding of over 20% on a year-over-year basis. Polycom's weighted average diluted share count in Q1 2014 was 142 million shares. Additional financial and operating information is available in our press release and on supplemental materials located in the IR portion of our Web-site.
Now moving onto guidance for Q2 2014, please note that the financial guidance provided on this call is valid as of today only and Polycom will not provide update to this guidance, regardless of changes that may occur in the future. The key consideration for our Q2 2014 guidance includes the following. We are cautiously optimistic in the Americas and EMEA as these economics continue to recover.
In APAC, we are mindful of a more challenging macroeconomic environment. We expect ongoing strength in the UC Personal category which typically has lower gross margin than our UC Group and UC Platform products. As we focus on driving operating margin improvement, our emphasis will be less on a specific breakout of gross margins and operating expenses and more on the attainment of our operating margin goals.
For Q2 2014 guidance, we expect the following; revenue ranging from $333 million to $343 million; non-GAAP gross profit margin ranging from 58.8% to 59.2% of revenues; total non-GAAP operating expenses ranging from 49.0% to 48.7% of revenues; non-GAAP operating margin ranging from 9.8% to 10.5%; non-GAAP tax rate of 20% and a GAAP tax rate of 21%. Interest and other income and expense is expected to be an expense of approximately $2.7 million. Share count for earnings per share is expected to be an estimated 143 million diluted shares. We expect non-GAAP EPS ranging from $0.17 to $0.19 per share. And finally, we expect GAAP EPS to range from $0.04 to $0.05 per share. Additional information, including GAAP line item guidance, is available in the supplemental materials on our Web-site.
Our ongoing actions to improve operating margins will be implemented throughout 2014. Future expense levels will vary depending upon the level and timing of reductions and reinvestments each quarter. As such, we suggest that analysts do not make changes to their future models at this time and we will continue to update you on our progress each quarter.
Now, I will turn the call back over to Peter. Peter?
Peter A. Leav
Thank you, Laura. In summary, we are pleased with Polycom's Q1 financial results and our position in the overall market. As a team, we will continue to take a thoughtful, strategic and opportunistic view of our business to identify opportunities for improved revenue and operating performance. We look forward to updating you on our progress throughout the year and appreciate your feedback, support and ongoing commitment to Polycom. Operator, we are now ready to begin the Q&A portion of our call.
Question-and-Answer Session
Operator
(Operator Instructions) Our first question comes from Kent Schofield with Goldman Sachs. Please go ahead.
Kent Schofield - Goldman Sachs
First, just a clarification question on the partner OEM conference phone situation. Is that now wound down, meaning those no more impact in 2Q or is there further impact embedded in the guidance that you gave?
Peter A. Leav
It is not wound down. So that is something that will impact us through the upcoming quarters and we should anticipate a $45 million to $50 million impact through the year, somewhat equitably balanced amongst the four quarters. If needed more, I can provide more specifics, but that's a compare that is beginning to impact us I think is best said.
Laura J. Durr
I think the one thing I would clarify what I think he mean is, we don't expect any additional revenue in '14 from that arrangement but we will see the headwind year-over-year as Peter described.
Kent Schofield - Goldman Sachs
Got it, got it. So Q-on-Q there is no more impact but year-on-year obviously there is, given the relationship is down and it's kind of throughout the year last year?
Laura J. Durr
Yes, quarter to quarter the impact will be small.
Kent Schofield - Goldman Sachs
Okay, so that's helpful.
Peter A. Leav
You got it.
Kent Schofield - Goldman Sachs
Okay, yes, thanks for the clarification there. And then on to the more important question. On the UC Group side of things, it came in a little bit better than we were looking for. You mentioned that the Group Series saw a nice spike up. I was wondering, Peter, if you could kind of give us some higher-level dynamics in terms of now that you've been in your seat for a little while and have gotten to see that business, how do you think about the growth opportunities in that UC Group business, especially around the product side of things but then some color on the services side as well, given that is the largest percentage of your revenues?
Peter A. Leav
You bet, and having discussed the OEM relationship, we'll table that. As it relates to Group video, we are seeing what really is an interesting transition in the market, and that market had decreased fairly consistently for most of the last year, call it mid-single digits. We are seeing that market somewhat hold steady but ASPs are declining. So, average selling prices are going down, but not at a rapid rate.
Now for us, because of the transition from HDX to Group Series, we're seeing a real benefit and competitive opportunity to both take share and improve our margins, and now we have gone from 26% of our Group video business is now with HDX we're now at 36% in the Group Series category and that's been to our benefit and having accretive value for the Company. We're also seeing customers take interest in the fact that we've got enhancements that are competitive advantages not only to what we had in the past but to what the competition offers.
Additionally, we've got an installed base of over 300,000 HDX end points. So the installed base that – over the course of time, that will reap the benefit in this transition as well. So generally speaking, it's a very good business for us, it's gotten better from a profit standpoint and Group Series is the biggest impetus and component of that.
Kent Schofield - Goldman Sachs
Great. I'll jump back in queue. Thank you.
Operator
Our next question comes from Mike Latimore with Northland Capital Markets. Please go ahead.
Mike Latimore - Northland Capital Markets
On the personal device category, is Lync and cloud phone system, are they equal drivers or is one becoming more of a driver here for personal devices?
Peter A. Leav
So Mike, we don't break it out but certainly the OpenStep space through our service providers, it is very, very expansive. Additionally, we're pleased with our results. We had looked at a tougher compare going into the year but we certainly continue to see significant growth in that space. So both pieces are growing, both the OpenStep and the Lync pieces, and both are contributing but there's a bit more of a skew towards the aforementioned service provider piece of the business.
Mike Latimore - Northland Capital Markets
Got it. And on the services specifically, can you break out roughly what percent of services is maintenance versus say professional service?
Peter A. Leav
Sure. Laura will jump in and give you some color.
Laura J. Durr
So roughly about three quarters of our business is driven by maintenance and then the other quarter is driven by the managed services and payment services such as implementation and adoption services.
Mike Latimore - Northland Capital Markets
And last question, what should stock-based comp be kind of on a quarterly basis going forward?
Laura Graves
The question was related to stock – sorry Mike, we were having a hard time hearing – the question was related to what stock comp expense should be on a quarterly basis.
Laura J. Durr
Sure. So, stock comp should be about to normalize back in Q2, maybe approximately $14 million a quarter.
Mike Latimore - Northland Capital Markets
Great, thank you.
Operator
Next question comes from Kim Watkins with Citi. Please go ahead.
Kimberly Watkins - Citi
UC Platform, that business actually, that segment actually looked pretty strong, it surprised us through the upside, it's the first quarter, I think it's gone on a year-over-year basis and a couple of quarters now. What drove that growth, anything specifically, if you could provide us a little bit of additional detail there? And then just a question, longer term as you think about this transition to virtual RealPresence and RP One, how do you expect that to impact ASPs and the revenue levels over the next several quarters?
Peter A. Leav
Okay, Kim, I'll take the first part first, it's Peter, good to hear from you, and then I'll jump in on the second part regarding the RP software suite. So first and foremost on UC Platform, it was an improvement and we were pleased to see it. The larger portion of the improvement came from services in that space which is a good thing and it's obviously very significant and continues to be a very formidable business for us.
The other piece which is a watch item is that business grew even though Asia did not have a stellar quarter. So the tie-in between UC Platform and Asia is usually something that I'm learning to keep an eye on and that business is doing okay with 3% growth year-over-year without Asia growing is also a reasonably good sign but we've got to keep an eye on both because platform is very tethered and tied to Asia.
So generally, services overage, an okay quarter on the product side but the services piece of the business was solid, and again Asia being a little bit down, typically hurts Platform a bit, so as we start to see improvement in that space, we'll look for improvement in Platform as well.
On the RP One and RPVE side, it's still very new but we are transitioning and I'm really proud of the team and I mentioned the wins because it's good to see our Company start to reap the benefit of investments that we've made that are very accretive, and certainly selling software is accretive and it's differentiating us in the market and enabling us not only to go downmarket to a mid-tier space, it also enables us to more broadly cover the enterprise.
The other thing that's very impressive about what we do is we now have an offer that enables us to reap the benefit of CapEx with perpetual software licenses with RPVE and also reap the benefit of OpEx should customers, most notably those in the mid-tier, opt to go into a mode of what we call an annuity base to a ratable model, and the fact that we have two offers is starting to really make a difference, and in our case it's all additive, it's all net new, we're not transforming an existing software business or moving it to the cloud, we're starting really from a very small base and moving forward, and again it's very margin accretive. So I hope that helps.
Kimberly Watkins - Citi
Yes, it does. I don't want to put working amount on that, but just to clarify, it doesn't sound like you were baking in or expecting any big step-down in ASPs as a customer moves from like a hardware product to a software product.
Peter A. Leav
No, I think that's – I appreciate the clarification question – that's the case. We don't anticipate that being a massive transformation either for us or certainly in the market at this point and we see it as largely additive. There may be pockets of situations in which we see a bit of a transfer, but no, I don't think that's going to cause a massive degradation in ASPs at present. And should the market shift, we are absolutely working to be ahead of it. So we'll get there but that's how we see it at this point.
Kimberly Watkins - Citi
Okay. Second question I wanted to ask is on stock buyback. Obviously you're still in your ASR right now through the June quarter as Laura discussed, but you've got just about [2.50] (ph) in that cash per share, it looks like your U.S. cash went up. Could we see some more buybacks in the second half of the year or could you talk to where your priorities lie for cash use?
Laura J. Durr
This is Laura. So if you noted, we are in the middle of ASR program and we also talked about we just completed over 20% repurchase in the fourth quarter. So we're going to continue to look at our best utilization of our capital. So that's where we're at right now.
Kimberly Watkins - Citi
Okay. And then one last clarification, the $0.01 benefit from the higher other income, what did that result from?
Laura J. Durr
It was primarily a result of the release of a sales tax reserve.
Kimberly Watkins - Citi
Okay, complicated stuff. Thanks so much.
Operator
(Operator Instructions) Our next question comes from Amitabh Passi with UBS. Please go ahead.
Amitabh Passi - UBS
Peter, I had a couple of questions for you. As we look at the sequential growth from your first calendar quarter to your second, how would you break down the growth expectations across your three major categories, Group Systems, Personal Devices and Platform? Is most of the growth coming from Personal Devices sequentially?
Peter A. Leav
Is he asking upcoming quarter?
Laura Graves
Yes, he's asking going ahead. Sorry, we were having trouble hearing.
Peter A. Leav
Amit, sorry, we missed it. So are you asking related to the upcoming quarter?
Amitabh Passi - UBS
Correct, going from 1Q to 2Q, I'm just trying to get a sense of sources of growth across your three major product areas.
Peter A. Leav
Got it. Thank you. At this point, we're expecting to be likely in the range that we have been in, and Q2 is still in the process of being finalized in some ways, but we expect to be roughly in the same general range. Although if we see this Group Series business continue to transition, meaning UC Group Series business on the Group video side transition as it has, meaning from HDX to Group, we'll see an improvement in the margin in that space because of that. But again, as we were asked at the onset by Kent, we'll see the transition of that Cisco OEM business year-over-year out but not a huge impact quarter-over-quarter but probably a slight downtick.
Personal Devices, again we expect to be in that same general range and the market continues to show growth, we'll continue to do that, we have certainly made investments. And Platform may be a tougher compare upcoming. We've got to keep a keen eye on Asia. I was just there. I'm very pleased with our presence, I'm very pleased with our share, but we've got some lumpiness in the business and we'll continue to keep a watchful eye on UC Platform. So we're going to continue to balance on all fronts and continue to be very focused on operating margins as we look at that balance.
Amitabh Passi - UBS
And then just on the OpEx front, we saw a nice step-down in sales and marketing. Should we expect any further significant rationalization or do you think we are now at a pretty comfortable run rate as we look at the rest of the year?
Peter A. Leav
So I'll let Laura jump in too, but it's a really good question. We've done a lot of historical analysis in looking at how the Company has been run and certainly it's the first time in about eight quarters that we've been in the 49% range, and that's important. Getting into the low to high to low to mid 50% range of OpEx as a percentage of revenue, I think created some challenges, and we'll continue to be balanced. But we have investment areas. I certainly expect us to continue to stay focused on those. We have some headcount moves to make in considering the opportunities we see for growth in the aforementioned pockets of growth.
So Laura I think gave reasonable and fair guidance. We'll continue to invest for the long-term in making great decisions and we're not going to go beyond where we think would be a reasonable place to buy us an opportunity to continue to be leaders in our space. So with that said, I think the guidance is right on with that note, no surprise, and I think that's a good way to look at it and manage it.
Laura J. Durr
The only thing I would add is that we did have a little bit of a benefit in Q1 just from the timing of the actions and then the redeployment or the reinvestment of some of those expenses that Peter talked about. So I think the guidance reflects what we expect to do as we move forward into Q2.
Amitabh Passi - UBS
Got it. And then just one final one for me. Can you remind us how big U.S. federal was for you and just what are you seeing in the years ahead in that sector and what are your expectations over the next couple of quarters?
Laura J. Durr
So we don't typically breakout U.S. federal just because we think they don't buy directly from us, but if I were to look at it, Q1 was in line with our expectations and slightly better than a year ago, but roughly our vertical mix was about the same as it was a year ago.
Peter A. Leav
So, Amit, just to add color, as you look at it, there's a seasonal aspect of course with the government buying season upon us. So we are fully invested in that space and will continue to be, but that's all built into what Laura shared as it relates to our guidance.
Amitabh Passi - UBS
Okay, perfect. Thank you.
Operator
That was our last question.
Peter A. Leav
Okay. So again, I would like to thank all of you for joining the call, I'd like to thank the team for their support and I'd like to thank the Polycom team as we begin to transition the Company and make strategic decisions and focus on operational prowess. I appreciate our beginning. We have a long way to go and the team knows that but we are steadfast in our approach and our commitment to improve operating margins and continue to be successful in the markets in which we play. Thank you very much and we look forward to updating you throughout the course of the year.
Operator
Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnected your lines.
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