Polycom CEO Discusses Q2 2011 Results - Earnings Call Transcript

Jul.21.11 | About: Polycom, Inc. (PLCM)

Polycom, Inc. (NASDAQ:PLCM)

Q2 2011 Earnings Call

July 21, 2011 5:00 p.m. ET

Executives

Michael R. Kourey – Chief Financial Officer

Laura Graves – VP of Investor Relations

Andy M. Miller – President & Chief Executive Officer

Analysts

Troy Jensen – Piper Jaffrey

Jason Ader – William Blair & Company

Jess Lubert – Wells Fargo Securities

Tavis McCourt – Morgan Keegan

Tim Long – The Bank of Montreal

Bill Choi – Jeffries &Company

Mark Sue – RBC Capital Markets

Rohit Chopra – Wedbush Morgan

Sanjiv Wadhwani – Stifel Nicolaus

Stephen Payton – Gleacher and Company

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Polycom’s Q2 2011 quarterly results conference call. During the presentation all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session. (Operator Instructions)

As a reminder, this conference is being recorded, Thursday, July 21, 2011.

I would now like to turn the conference over to Mike Kourey, Chief Financial Officer. Please go ahead sir.

Michael Kourey

Thank you, operator. Hello, and welcome to Polycom’s second quarter 2011 earnings call. I’m Mike Kourey, Polycom’s Chief Financial Officer. Before we get started, I’d like to introduce to you Laura Graves, Polycom’s new Vice President of Investor Relations. She has recently joined the Polycom team from Cisco where she had been head of global Investor Relations since 2006. She will be a great addition to the Polycom team, and we look forward to having her on board. Laura.

Laura

Thanks Mike, thank you. Hello, everyone, welcome and thank you for joining us today. I’m Laura Graves and here with me is Andy Miller, our President and CEO, Mike Kourey, Polycom’s Chief Financial Officer, and I’m pleased to be joining Polycom at such an exciting time.

As with previous quarterly calls, Polycom is again augmenting today’s voice conference call with a webcast. If you would like to receive the webcast, please open your browser at this time and enter Polycom’s homepage, which is polycom.com, and click on the Q2 earnings call link. For the analysts participating in the Q&A session, leave your call live so that you can use your conference call connection for the Q&A session at the end of our call.

Please note that Q&A is for financial analysts. We welcome all others to listen in to the Q&A session. Each analyst will be limited to one question and one follow-up.

Please also note that this entire webcast, including Q&A will be maintained on Polycom’s website for 12 months from today.

Also, a link to the call will be provided on Twitter, Facebook, and Linkin at Polycom.

And most of you participating in this call are aware of the federal legislation regarding forward-looking statements. Accordingly, we would like to note that during the course of this conference call, Andy and Mike will make forward-looking statements and present forward-looking visual materials regarding future events, anticipated future trends, future product offerings, and the future performance of the company including our financial guidance, strategic initiatives and future investments in the business.

We wish to caution you that such statements and visual materials are just predictions that involve risks and uncertainties and that actual events and results could differ materially. We discuss a number of these risk in detail in the company’s SEC reports including most recently in the company’s quarterly report on Form 10-Q for the quarter ended March 31, 2011. And any forward-looking statements must be considered in the context of such risk and uncertainties.

Also please note that 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. In addition, 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 also posted on our website.

Now with that out of the way, please let me turn the call over to Andy Miller, our President and CEO. Thanks Andy.

Andy Miller

Thank you, Laura. Good afternoon, everyone. I’m pleased to announce that the momentum we established in Q1 continued in the second quarter at both the top and bottom line. We are executing on our strategy with speed and precision and the entire Polycom team has helped to drive excellent results over the first half of the year, which we believe will position us well for significant strategic and financial gains in the second half of 2011 and beyond.

Specifically in Q2, we achieved a record revenue of 366 million growing 24% year-over-year and 6% sequentially. Also, driven by better-than-anticipated gross margins, we generated a non-GAAP operating margin of 17.1% and non-GAAP EPS of $0.26. We exited the quarter with a record 187 million in deferred revenue, up 34% year-over-year and 4% sequentially.

Finally, we generated 85 million in quarterly operating cash flow, another record for Polycom. When I reflect on the successes that we’ve achieved so far, I am particularly pleased by how consistently we have executed against a strategic plan that we set fourth at the beginning of the year.

As you may recall, our 2011 strategic plan, which builds on its successes we delivered in 2010, is founded on five strategic pillars. Number one, the UC Cloud, two UC Mobility, three our UC Ecosystem, four the Intelligent Core, and five Polycom’s UC Innovation Engine.

Just six months after announcing these imperative, Polycom has delivered significant advances on all five fronts. Importantly, we have also widened the gap competitive, gained meaningful market share and continued to improve our market positioning to best capture the momentum in the UC market by delivering transformative communications and collaboration solutions that customers can use in their work and social lives.

We continue to gain share this year, according to the most recent available market data. In fact, first quarter data recently released by market research firm, Wainhouse Research showed that in Q1 alone, Polycom gained a significant five points in worldwide market share in video systems and 3 points of share in UC network infrastructure, what we call UC Intelligent Core Solution.

These accelerated share gains are on top of the gains that we already made in 2010. Clearly the network effect for video is beginning to take hold, and is a key driver for our business. We believe these market share gains are validating Polycom’s position in the industry as the number one UC provider of choice.

We believe our market reach and share gains are driven by our leading edge innovations, strategic partnerships, high touch go-to market, and premier brand. In fact, our strategic partners, the Polycom Open Collaboration Network, contributed approximately 25% to Polycom revenues in the second quarter, up from 23% in Q1.

In support of continuing deep innagration with our top strategic partners, we significantly broaden our strategic alliance with Hewlett Packard last month. You may recall that last month we announced we are acquiring the visual collaboration business, comprised of Halo Telepresence and the Halo Managed Services Network for approximately $89 million in cash.

We believe the transaction, which underscores Polycom’s focus and commitment to bring in the most advanced and innovated UC solutions to market, bring significant advantages to our business.

First, we added over 425 blue chip customer sites with many global 1,000 customer across 36 countries. Second, we became an exclusive provider to HP for telepresence, group video systems, and UC network infrastructure for both resale and internal use.

Third, we approximately doubled our market share in immersive telepresence with the closing of the acquisition. And fourth, we gained an excellent team of approximately 125 professionals in telepresence development, go-to market, and managed services. And finally, we’re developing an enterprise grade video application for HPs WebOS mobile platform.

I’m pleased to report that since our announcement last month, Polycom and HP have been working closely together to pave the way for a seamless and rapid integration and we expect this ground breaking transaction to close later this month.

We have also recently expanded our strategic partnership with Microsoft through our upcoming launch of the Polycom CX7000 unified collaboration system that natively integrates with Microsoft’s leading Link platform. This is in addition to our many other strategic initiatives with Microsoft, including Polycom’s development of SVC, or scalable video coating. For Microsoft Link and our joint activity across a broader ray of infrastructure, group system, and devices that integrate tightly with link.

This breakthrough integration provides our mutual customers with an unparalleled user experience. In fact, based on everything that we have achieved through this partnership, Microsoft named Polycom as of 2011, Microsoft Unified Communications Innovation Partner of the Year.

In a few moments I’ll highlight a few significant customer wins that we achieved with Microsoft and other key strategic partners.

Next, I’d like to discuss our significant advances in Polycom’s UC Cloud solutions. Importantly, as a further testament to our leadership position in the UC Ecosystem, we launched the industry’s first open video exchange cloud with AT&T, BT, Telefonica, Verizon and a host of other global leading service providers, named the Open Visual Communications Consortium, or OVCC for short. This cloud focused industry body has been created to establish an open, secure, high-quality and seamless video communications network, cross company and cross carrier that will play a major role in advancing business to business, and business to consumer video communications.

This premier group of service providers expects to be in trials during the second half of 2011 and expect to be fully in the market in mid-2012. Concurrent with this activity, Polycom is continuing to make progress with the early cloud-base delivery of UC solutions, and in Q2 Polycom won key customers with our service provider grade UC Intelligent Core infrastructure solutions.

I’ll touch on these later as well when I highlight some of the recent customer wins. Further, extended reach of the UC Cloud we are continuing to develop breakthrough innovations on to the leading Noval platforms in use today. With our highly differentiated solution, customers can seamlessly and securely communicate by video, share content both socially and into their employer’s video telepresence network.

We believe our secure high-quality open approach is unique to Polycom and will become these standard for noble UC collaboration by knowledge workers across the globe. Stay tuned as Polycom makes some important mobility announcements later this fall.

As I mentioned earlier, we have significantly widened the gap between Polycom and our competition in recent quarters. These gains are evident in growth, fueled by key verticals such as the U.S. Federal government, where we are making significant gains through our multi-prong approach of leveraging our superior UC Intelligent Core network infrastructure, building out our sales coverage and presence, in UC Federal space, and in securing the approvals that we need to qualify for Fed programs including key DOD contracts.

In fact, we have already begun to experience success in the second quarter with a significantly improved sales pipeline that when coupled with our expanding [inaudible] approvals, should enable Polycom to capture a larger share of UC Federal contacts – contracts excuse me, during Q3 and Q4.

Geographically we are continuing to see strong momentum in the emerging markets, particularly in the brick natures of Brazil, Russia, India, and China.

In fact, Polycom’s sales grew more than two times our consolidated growth in each of these markets. Looking forward, we expect demand, both for cloud and customer premised-based deployments to remain very strong in the emerging markets. And as such, we are continuing to make investment to capture the momentum there, especially in China and India where we are beginning to gain visibility for opportunities at the multimillion dollar level for large scale rollout through service providers and large enterprise.

Our leadership, strategy, and tele-go-to-market execution in these geographies continue to be nothing short of stellar. With our leading UC solutions, we plan to continue to lead wide scale adoption throughout these emerging markets.

During the quarter, we won several large accounts in the emerging markets due to our best in industry solutions. For instance, we won a multimillion dollar video solution contract at Petrobras, the leading Brazil based global energy provider. This competitive win was entirely based on the UC Intelligent Core from Polycom, which will ensure Petrobras can significantly scale the use of Polycom video collaboration throughout their entire global operations.

In India, we won a large rollout of our UC Intelligent Core infrastructure and a broad deployment of HD video at Lanco Infratech, the large global solar power plant provider in support of the global expansion.

In China, we won a significant rollout of Polycom UC Solutions for risk management provider, Tai Ping Life insurance. We also close a competitive win in the fast growing oil and gas sector in China with our end-to-end UC offering.

In addition to these tremendous successes in brick geographies, working with our Polycom open collaboration Ecosystem partners, our integration solutions continue to drive wins with key customers worldwide. For an example with IBM, we won the Australia Bureau of Statistics for large role out of UC Intelligent Core and management infrastructure. With service provider Orange Business Services, we won LANSA, a Switzerland based leading global supplier to pharmaceutical and healthcare industries. LANSA is ruling out our OTX Immersion Telepresence Solution and selected Polycom due to our open architecture and Microsoft Link integrations.

Also, a significant OTX telepresence win. We closed with Prudential in BT. Prudential plans to utilize this telepresence network to further enhance agility and productivity across the distributed operations. With AT&T we displaced a major competitor to a large HDX video rollout at business services provider FedEx based on our open architecture and best-in-industry total cost of ownership or TCL.

In the U.S. Federal Government we achieved significant win with an important Department of Defense agency, displaced in a ten year competitive relationship, Polycom won the infrastructure and UC end points due to our H264 high profile and dynamic resource allocation technology and our Microsoft active directory integration.

Also with the U.S. DOD, Polycom won a 18 month deployment for a key military learning facility demonstrating the value of our superior video quality in best of industry TCO.

These are but a few of the strategic customer wins that not only drove our strong Q2 revenue growth, but extended Polycom’s customer footprint across key geographic and vertical markets worldwide.

Finally, before I turn the call over to Mike, I’d like to officially welcome Tracey Newell, to our executive team as Polycom’s new executive Vice President of Global Sales. Throughout her career, Tracey has focused on selling networking, software, and cloud services, all strategic areas for Polycom. She brings diverse experience leading teams across enterprise, commercial, vertical, public sector and small-to-medium business markets. Each of our theater presences and global sales operations will report to her in this newly created role.

Tracey promises to be a valued addition, position us to grow from the 1.5 billion to the 3-plus billion level over the next few years. She has a proven sales leadership track record at leading companies including Juniper Networks and Cisco Systems. Tracey and I worked together at Cisco and I am delighted that she will be partnering with me here at Polycom as we execute on our plan to expand our brand and customer presence worldwide.

On that note, let me turn the call over to Mike for discussion of Polycom’s financial highlights. Mike?

Michael Kourey

Thank you, Andy. Before I get started, please note that for the financial guidance that we’re giving today, Polycom is not assuming the responsibility to provide any updates regarding this financial guidance regardless of changes, adverse or otherwise which may occur in the future. Also, during this portion of the call, I remind you that we will both be making forward-looking statements including guidance regarding our expectations of future financial execution and performance, which are subject to many risk and uncertainties that could cause actual results to differ materially from our expectations.

Moving to a look at our results, as Andy stated earlier, Polycom generated record revenues in the second quarter of $366 million. This represents a sequential increase of 6% and a growth of 24% compared to Q2 of last year.

Looking at revenue by geography in Q2, America’s revenues grew 8% sequentially and 21% over the year ago period. EMEA revenues grew by 4% sequentially and 20% year-over-year. And Asia revenue grew 6% sequentially and a significant 35% year-over-year.

Moving to revenue by product line, including the services attached to each, Polycom’s UC Intelligent Core or Network Infrastructure Solutions continued to gain momentum, growing a significant 13% sequentially and 51% year-over-year to a record $60 million or 16% of revenues.

Revenues for UC Group Systems which includes all of immersive telepresence, group video and group voice systems grew to a record $236 million or 65% of revenues in Q2 increasing by 3% sequentially and by 20% year-over-year.

UC Personal Devices which includes all desktop video devices, desktop voice and wireless LAN products grew to a record $69 million or 19% of revenues in Q2 up 12% sequentially and 18% year-over-year.

From a channel standpoint, the revenue breakout for the second quarter is as follows, 29% through value added resellers, 59% through distributors, 10% through service providers and 2% direct.

Note that 4 percentage points of our distribution business in Q2 was driven by the ITSPs, another service provider who sold through distribution, making the total service provider percentage 14% in the second quarter, a three-point increase from the first quarter.

Driven by ramping demand in Q2 we shipped 48% of revenues in the last month in the quarter. Polycom’s deferred revenues grew to a record $187 million in Q2 growing 4% sequentially and 34% over the year ago period.

Immerging geographies continued to be a key driver of our revenue growth in Q2 with China, India, Russia, and Brazil all growing over 50% year-over-year. Our emerging markets coverage strategy is clearly yielding results with emerging markets now representing 21% of our consolidated revenues. We also saw particular strength in U.S. Federal, U.S. Enterprise, Korea, and Australia.

Moving to the statement of operations, non-GAAP gross margins for the second quarter were 61.7%, up 60 basis points from Q1, an increase in 200 basis points over the comparable period last year. Polycom’s non-GAAP operating expenses increased sequentially in absolute dollars and were up slightly as a percent of revenues in Q2.

Looking at the specific second quarter non-GAAP operating expense line items on a percent of revenue basis, sales and marketing represented 27.5% of revenues for the period, down from 27.8% in the first quarter. R&D closed at 12.5% of revenues, up from 12.2% in Q1.

G&A was 4.6% of revenues up from 4.5% in Q1. In total, non-GAAP operating expenses represented 44.6% of net revenues in the second quarter, up by 10 basis points from 44.5% in net revenues in the first quarter.

Moving down the income statement, second quarter non-GAAP operating income grew 9% sequentially and 53% year-over-year to $62 million or 17.1% of net revenues. This compares to $41 million in non-GAAP operating income or 13.9% of net revenues in Q2 of 2010, a 320 basis points improvement in operating margin.

As a recap of our performance against our previously-stated long-term target model, we operated above the midpoint of our target gross margin range of 59 to 63%. Sales and marketing operated at 150 basis points over the high-end of its target range in support of our strategic plan. R&D operated 50 basis points over the high end of its target range and G&A continued to operate within its target range.

Our Q2 non-GAAP operating margin of 17.1% is 290 basis points below the low end of our target range of 20 to 22%. Other income and expense in Q1 resulted other expense of approximately $700,000 comprised of 100,000 of net interest income and approximately $800,000 of other expense. Net other expense was primarily driven by non-income related taxes and fees, which was primarily – partially offset by net foreign currency gains, which may not occur in the future.

Looking forward to Q3 we expect a net other expense of approximately $1 million. Moving to tax, you’ll note that our Q2 non-GAAP effective tax rate was 22.7%. Looking forward to the third quarter and beyond, we are forecasting a 25% effective tax rate based on our geographic mix, assumptions and other factors.

Of course our tax rate is subject to change based upon changes in geographic mix as well as changes resulting from any new U.S. or international regulations or interpretations.

Q2 non-GAAP net income of $48 million increased 10% from Q1 and grew by 58% from $30 million in the comparable period last year. Non-GAAP EPS diluted of $0.26 in Q2 was up $0.02 or 8% from the first quarter and grew by 53% from $0.17 in the year ago period.

GAAP EPS for the quarter was $0.16 per diluted share in Q2 compared to $0.07 per diluted share in the same period last year. Note that the EPS data for both current and historical periods reflect a two for one stock split that took effect on July 1.

Looking forward to Q3 we expect to continue – to benefit from our broad based demand both directly and through our strategic partnerships with Microsoft, IBM, Juniper, and others.

We also anticipate particular strength in the emerging markets in U.S. Federal as well as early wins being driven by our cloud base offerings and partnerships through the service provider community.

Even with the strong results in Q2 and the seasonality of the summer quarter, we are guiding organic revenues to grow by 3 to 4% from second quarter levels. In addition, as stated earlier, we expect our acquisition HPs visual collaboration business to close this quarter. Assuming a close of the transaction by the end of July, we expect this Q3 stub period to add approximately $10 million to Polycom revenues primarily in services. Therefore, including the acquisition we are guiding Polycom revenues to grow by approximately 5.7 to 6.7% from second quarter levels.

Also, even though we do not typically guide the beyond one quarter on most metrics, for your modeling purposes, I’d like to also provide you with some one-time guidance on what the HP visual collaboration business is likely to add to Polycom at the top line.

In Q4, we expect the contribution from the acquisition to be approximately 16 to $18 million in revenues with approximately 2/3 of that revenue coming from the services offering. Following the fourth quarter, we expect this segment of our business to grow at approximately the same rate as Polycom core business.

Driven by continuing solid pricing environment and our mix expectations, we anticipate organic Q3 gross margins to be consistent with second quarter levels. With the addition of the stub period, HP visual collaboration revenues, we anticipate third quarter consolidated gross margin of approximately 61% , the midpoint of our target range.

Of course, gross margin in the future may be higher or lower and are subject to mix variations and other factors.

Moving to operating expenses in Q3 we expect to benefit from continued sales force productivity gains, the contribution of our growing tele-sales engine, and by leveraging the go-to-market coverage of our strategic partners such as Microsoft, Juniper, IBM and of course our newly deepened partnership with HP.

We also expect to leverage our recent product innovations to continue to make market gains as well. Netting these factors and including the operating cost of this soon-to-be-acquired HP visual collaboration business, we expect Q3 sales and marketing expenses as a percent revenues to decrease by approximately 30 basis points from second quarter levels.

We expect R&D to decrease by approximately 50 basis points from the second quarter and G&A to decrease by about 10 basis points from Q2. As a result, we expect third quarter non-GAAP operating margin to increase by approximately 20 basis points from Q2 and by over 200 basis points from Q3 of last year.

As discussed previously, we continue expect non-GAAP operating margins to reach our objective of 20% in the fourth quarter of this year. Turning to the balance sheet we generated a record $85 million in positive operating cash flow in the second quarter. These operating cash results were driven by including profitability and our strong working capital management.

We exited the second quarter with cash investments of $609 million and, of course, the company continues to be debt free.

Moving to DSL, the company’s net trade receivables of $187 million resulted in a DSO of 47 days, a one day increase over Q1 and a 6 day increase over the comparable period last year.

Looking forward, we are maintaining our best-in-class DSO guidance of 40 to 50 days.

Inventory turns at the end of second quarter were 5.4 turns improving 80 basis points from Q1. We are now inside of our target range of 5 to 6 turns.

Regarding expecting share count, we expect Polycom’s weighted average shares for diluted EPS to grow by approximately 1.5 million shares in Q3 exclusive of stock repurchases as driven by the stock price and other factors.

During the second quarter we did not purchase any shares under our share repurchase program. As discussed earlier however, we will be using approximately $89 million in cash to acquire HPs visual collaboration business. Looking forward we have $118 million remaining in our share buyback authorization.

Of course in addition to future potential buybacks of our stock, our share count will change based upon Polycom’s stock price, any acquisition activity and other factors.

Moving to headcount, Polycom had 3,609 employees at the end of Q2 representing a 6% increase from the end of Q1. These additions are primarily in customer facing and product development roles in support of Polycom’s strategic imperatives.

At this time, let me turn the call back over to Andy Miller for closing comments.

Andy Miller

Thank you Mike. In summary, Q2 was a hallmark quarter for Polycom, both in terms of strategic achievement and financial accomplishments. We made significant progress with our key partners through the Polycom Open Collaboration Network, experienced significant acceleration in the adoption of our UC Intelligent Core network infrastructure solutions, and again, benefited from broad base demand for our suite of solutions across all major geographies.

We continue to leverage our unparalleled position in the UC industry as the only independent provider of scale. Through our cloud mobility and Ecosystem advances and market gains, we believe that Polycom is poised to capture the momentum, of the video communications market.

With these exciting market dynamics in Polycom’s industry leading capabilities, we expect to continue to deliver a strong revenue growth in a continued operating margin expansion including our expected achievement of 20% operating margin in Q4.

On that note, we would like to open the call to the financial analyst for questions. For all others, we invite you to stay on the call to listen in. Of course, 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 risk and uncertainties.

Is the conference call operator available at this time?

Question-and-Answer Session

Operator

(Operator Instructions). And our first question comes from the line of Troy Jensen with Piper Jaffrey. Please go ahead.

Troy Jensen – Piper Jaffrey

Thanks for – or welcome – congratulations on the nice quarter, gentlemen.

Michael Kourey

Thank you, Troy

Troy Jensen – Piper Jaffrey

Okay, so follow-up questions here on HP. I would be curious, Andy, how many HP sales people are trained on either Halo or Polycom’s system, you know versus the number by the total sales people that they have at the organization?

Andy Miller

Well, they have approximately 50 sales people that are specifically trained on the Halo system in that group that’s coming over to Polycom. But the broader HP sales force is also cognizant and compensated for that product line as well. So they’re specialists that we have acquired as it relates to transaction, the goal, one of the goals is with the exclusivity of HP Silicom selling Polycom products to their customer base, we know have not only the Heiler product line and network, but we also have the opportunity to reach out to the entire HP sales force worldwide to be able to sell the entire portfolio of now Polycom products and technologies.

Troy Jensen – Piper Jaffrey

Is it safe to say that that entire sales force, very few of them sell Polycom now?

Andy Miller

Well, they have a resale agreement existing with Polycom, albeit not exclusive, it will be exclusive at the close of the end of the month. So our focus is to train and ready, and have those sales people ready to be selling Polycom shortly after the close, very similar to what we’re doing with Microsoft and IBM, and other key partners.

Troy Jensen – Piper Jaffrey

So I guess, Andy, I’m just curious how you’re going to balance that because you’re talking about a huge sales organization, you know, with your existing channel partners that are selling video conferencing. What types of conflicts do you see and how can you do that without, you know, channel conflicts?

Andy Miller

Well, actually we’ve worked through that, Troy, it’s a great question. We really look at it two ways. The first is, what we’ve acquired with the Halo and Haven network, we’ve got 425 great customer sites around the world will quickly integrate the sales teams to be able to provide either customer intimacy around not only the technology required, but the interrupt ability and compatibility with existing Polycom technology.

So that one, we feel very comfortable with. The next piece is to get the entire HP sales organization to be trained and certified and specialized, not only the sales organization but the channel community to sell incremental products and technology to this incredible HP base worldwide.

So we see that in two parts, the short term, very quickly as Mike talked about is that immediate revenue coming in in Q3 and beyond. And then over Q4 and beyond is to work with the HP sales force, identically as what we’ve done with IBM and Microsoft, to get them certified, specialized and the resellers to really augment our sales team and to take advantage of this exclusivity in terms of delighting the HP customer base.

Troy Jensen – Piper Jaffrey

Okay. I seed the floor. Good luck on the second half, gentleman.

Andy Miller

Thank you.

Michael Kourey

Thank you, Troy.

Operator

And our next question comes from the line of Jason Ader with William Blair. Please go ahead.

Jason Ader – William Blair & Company

Yes, thanks very much. Hey, Andy, and Mike, I was hoping you could comment on the three problem areas that seem to be coming up again and again, you know, during the calls this week, the earnings calls this week.

One would be Europe. Two would be the fed. And third would be financial sector. If you could just give us some color on how you’re doing in each areas, whether you think you’ve guided conservatively enough for each areas given some of the challenges out there in the macro?

Andy Miller

Sure. Let me start that because I think I’m well versed and capable being able to talk through that. So in the EMEA piece, I look at our EMEA opportunities differently than some of the other companies that reported earlier this week.

We are very strong in the Nordic area. As you know, Tandberg was very strong in the Nordic. We’ve been able to take and gain market share in that area. So that is a growth area for us in EMEA.

We had a very good quarter, and we have a very good outlook into Russia and the CIS countries that I think are different from other companies that reported earlier in the week. And we’ve continued very strong momentum in U.K., France and Germany.

So albeit, everyone has softness in [inaudible] with Spain, Italy, Greece, and also in the Middle East. But we’ve been able to really gear our business towards the strong growth areas, specifically Russia, Nordic and, as I said before, Germany – Germany, France and the U.K.

So we feel very confident in our EMEA business, and in our EMEA leadership.

As it results to federal, I think our bullishness came through in Q2. We had a very solid Q2. As we all know, in Q1 we had continuing resolution. That broke free. We had a very good Q2 in federal, both on civilian and Department of Defense. As we said on the call, we’re seeing [inaudible] certifications, the extended sales force, and our focus area on UCIC taking hold. And we have a very, you know, carefully defined civilian DOD and Intel forecast outlook. So I am very confident of our federal business going forward.

And finally, the financial services financial sector, which isn’t as large as clearly EMEA or our federal business. We actually held very steady. If we look at the bulge bracket banks or we look at the hedge fund community or the insurance communities that we particulate in, it was actually a good quarter in Q2. So we did not see a falloff or any deterioration of momentum.

So I’m very confident about some of the things that we’re seeing versus what others saw, specifically as it relates to your question on EMEA, federal and financial services.

Jason Ader – William Blair & Company

Great. And then one follow up, Andy. You know, we’ve heard that there’s been a lot of, you know, very significant number of departures from Tandberg’s federal organization, some very high level sales people as well as some very high producing sales people I should say. Are those folks that you would be interested in given Tandberg’s historically success there in your history with him? I’m sure you know some of them.

Andy Miller

Well, we’re always interested in great talent. And in fact, several of the people that you mentioned have come over to Polycom and are contributing to our efforts, not only in Q2 but beyond.

As I said many times, we’re not trying to recreate a company. However, we are always looking for great talent. So the answer is yes, albeit very surgically to very specific endeavors that we’re trying to accomplish. But, yes we are and yes we will.

Jason Ader – William Blair & Company

Okay. Thanks, guys.

Andy Miller

Thank you.

Operator

And our next question comes from the line of Jess Lubert with Wells Fargo Securities. Please go ahead.

Jess Lubert – Wells Fargo Securities

Thank you for taking my question and congratulations on another strong quarter.

Andy Miller

Thank you.

Jess Lubert – Wells Fargo Securities

So questions on the gross margins. It looked like the service gross margin spike up a bit sequentially while the product gross margin kicked down. I was hoping you could discuss what drove that uptick in service margin and how we should be thinking about that going forward?

And then perhaps you could also provide some additional details as to why we didn’t see stronger product gross margins given the strength in network systems?

Andy Miller

Sure. I think that’s a great question. First of all, on the service piece, under Ramos leadership, the service teams throughout the world have done a very good job in really dissecting that organization and really building an efficiency model.

So although we’ve done a better and better job in the attach rate of maintenance contracts and renewal rates, and those kinds of services, we’ve actually done a very good job around the cost management of that.

And with that, we’ve had this significant increase in our services gross margins. And yeah, candidly looking forward, we feel quite good about that. So that’s the services piece.

On the product piece, the main driver there, Jess, is the absorption that we had. If you notice, we actually, in spite of the big revenue growth, we’ve actually had a slightly over $12 million sequential decrease in inventory dollars. So it was a big pop, 80 basis points in inventory turns. And with that, by definition, there was a chunk of less absorption, and that was the main driver on the product piece.

Jess Lubert – Wells Fargo Securities

So it sounds like the service gross margins are sustainable. Is there any reason why we wouldn’t see the product gross margins pick up as we head into the September quarter? And can you maybe just touch upon your expectations for Network Systems heading into the back half?

Michael Kourey

Well, I think we’re really very happy with the gains we’re making around our UC Intelligent Core network infrastructure as Andy touched on with U.S. Fed as well as our broader markets. We’re doing quite well there worldwide setting the new records and that big 13% sequential growth I think stages us well for that.

Clearly, that puts us in a good position from a product gross margin standpoint, but as always, Jess, I think you know this, we do try to be – I don’t want to say hedgy, but we want to be conservative around the way we look at the guidance for gross margin. We don’t want to parse it out too much looking forward; happy to do it like I just did retrospectively.

But as I’ve asked in the past, including the very last call, I just prefer to see modeling around the mid-point of the target range, around 61%. And I guess I’ll probably just leave it at that.

Jess Lubert – Wells Fargo Securities

Thanks, guys. Keep up the good work.

Michael Kourey

Thanks, Jess.

Operator

And our next question comes from the line of Tavis McCourt with Morgan Keegan. Please go ahead.

Tavis McCourt – Morgan Keegan

Yeah, thanks for taking my question. Mike, just a follow up on that service question. It also looked like preferred revenues were up a little more sequentially than anticipated. Was that service bookings or does the Acordin acquisition plan fit into this service movement at all?

Michael Kourey

That was a very small amount, so nothing major. It was a relatively small entity. So no, this was, and that’s a closing of an acquisition anyway. So no, this was just more in the just normal organic moves of the business. We’re doing a very good job around our maintenance contracts. We’re achieving a really good percent of services sales for the company, which is great, as you know, for stickiness and building up the long-term customer relationship.

And frankly, we’ve also been able to drive a margin model that gives us really no preference of product versus service from a pure finance mechanics standpoint. So I’m actually very pleased with where we sit today.

Tavis McCourt – Morgan Keegan

Great. And Andy, a follow up for you. I apologize if you covered this in the prepared remarks, I got on a little late. But in terms of the cloud-based initiatives and the consortium of service providers that you’ve started for video, when do you expect any kind of revenues from those initiatives? How long is this ramping period of getting relationships going and getting technicalities addressed before we can actually start seeing some real service provider deployments of video conferencing?

Andy Miller

We did cover that. We covered that in terms of OVCC taking hold in terms of material revenue in mid-2012. As we stated at our June 1 event, in the back half of 2011, we already have some substantial pilots underway. We will continue to evolve that in Q4, and I think we’ll start seeing that material revenue as we said, in mid-2012.

We’re very pleased with the progress that we’re making to date.

Tavis McCourt – Morgan Keegan

Great. Thanks a lot.

Andy Miller

Thank you.

Operator

And our next question comes from the line of Tim Long with the Bank of Montreal. Please go ahead.

Tim Long – The Bank of Montreal

Thank you. First the question and then I’ll come back with a follow up. Could you just give us a little bit of color, you give the guidance to Q3, obviously, and if you could just provide some color around getting to that 20% in the fourth quarter? I mean, we’ve been looking at, you know, 30, 40 basis points of improvement for the last few quarter including the September guide. We’ll have a full quarter of HP, which could be a little drain on gross margin and some more OpEx hitting for the full quarter.

So Mike, if you could just give us some color on how we’re going to have a much bigger sequential improvement later in the year for operating margins, that would be helpful.

Michael Kourey

So, Andy, do you want to start it or do you want me to start it?

Andy Miller

Let me just start it and then I’ll turn it over to Mike because this is – has been a passion of our company to keep our commitment around the 20% operating margin in Q4. And we are very focused as a company to do the right thing for the shareholder, but to also do the right thing for Polycom.

I think we have a very clear path to the 20% operating margin in Q4 by the following points, and Mike can expand upon them.

First, from the comfort and confidence that we have in terms of our revenue growth that Mike talked about in Q3, and also continued growth. In Q4, we see the revenue and have ability to hit that margin level.

We also, as we’ve talked in the past several calls, we spent a lot on OpEx in terms of bringing on board the sales force, our investments to R&D, and we feel that we’re 90% there in terms of sales force, OpEx investments, that we’re seeing that productivity quarter by quarter, and we can start tapering off some of that investment because we’re getting that productivity gain.

So revenue, one. OpEx investment, two. Productivity, three. And fourth is around, frankly, Microsoft and the POCN Network. The ability to have that expanded sales force, that influence revenue, the market share gain. If we really look at those four elements, those both quantitively and qualitatively get us to that 20% operating margin while being able to continue to run our business the way we see fit to continue to gain share and to grow our business, and position us as the leader in 2012.

Michael Kourey

It’s pretty hard to add to that. I think Andi hit all the right points. I’m happy to take any follow ons to that.

Tim Long – The Bank of Montreal

Okay, yeah. Just a separate one, maybe just hitting the gross margin line a little bit. With both the emerging markets growing and the partner revenues, it seemed like there hasn’t been much gross margin impact negatively from either of those, where several companies do see that.

First of all, why? And then second of all, is there risk that over the next few quarters that you might start to see more gross margin pressure either based on the regional mix or more sharing with partners? And then, I’m done. Thank you.

Michael Kourey

That’s a great question, Tim. So from a regional standpoint we’re actually doing a very good job of building our value proposition and effectively running it through our high-tech sales force, and partners and channel for that matter, in the various regions.

So if you look at the emerging markets, we’re doing quite well from a gross margin standpoint. So I know that is different in other kids of value propositions at other companies, but for Polycom, we’ve done a very good job in building value in those markets, even against different competition, like say [inaudible] in China, to be the most harsh one you would typically expect. In fact, we do very well there from a gross margin standpoint, which might be counterintuitive.

So that mix isn’t driving any adverse outcomes in GM. From a partner standpoint, some of these partners are a sell-through partnership, Tim. But some are also sell with. We’re actually going out in the market together. Microsoft being a premier example of that. And of course, Andy’s an expert at that and has spent quite a bit of time in the field with the Microsoft executive team.

But in fact, in that case, we’re partnering together, we’re going in as one, but separately in a way that it is not going through their balance sheet, for instance, and so there is not margin impact that’s adverse in that case.

In fact, it can often be the opposite because we’re able to build that holistic value of the full value of length coupled with the full value of Polycom’s UC solution.

So in fact, that could even be accretive to gross margins, some of these deals, but there’s no structural reason that it pulls down GM.

Tim Long – The Bank of Montreal

Okay, thanks, guys.

Michael Kourey

Thanks, Tim.

Operator

And our next question comes from the line of Bill Choi with Jeffries. Please go ahead.

Bill Choi – Jeffries &Company

Okay, thanks. A question and a clarification. Going back to gross margin on services, it’s quite impressive. You had sequential growth in revenue, whereas the COGs on that line actually declined sequentially. And so I guess I just want to better understand what structurally has changed and whether that really can be maintained going forward, this higher margins?

Michael Kourey

Yes. As we mentioned earlier, we do feel very good about our services, GMs, going forward. The – much of the work we have done is structural work around the cost basis for services revenues, around services COGs itself, around staffing and services, around geography and services, et cetera. So we do feel very good about that. And I’m not giving specific guidance by products and service lines. You know we’ve never done that. We don’t intend on it. But I am saying that the work that we’ve done is largely structural, and yes, we feel very position about that going forward.

Bill Choi – Jeffries &Company

But how would you get a cost item going down as revenue goes up? I’m just curious, for the quarter?

Michael Kourey

Sometimes it can be headcount related. It can be outside services related. It can be other COG drivers related.

Bill Choi – Jeffries &Company

Okay. And then the follow-up question is, you know, following up on Tim’s question I guess. As far as headcount’s concerned, you’ve been adding more and more increasingly every quarter sequentially. And is that build up essentially done, and so, you know, we’ll look for headcount increases to moderate quite significantly from here to reach that 20%? Can you comment on headcount investments going forward? Thanks.

Michael Kourey?

So, you want me to set that?

Andy Miller

Yes.

Michael Kourey

Yeah. So if you look at the next quarters here, yes. I think the short answer is we would expect to see that moderated. As Andy talked about, much of that investment is – the forward investment that we’ve done is behind us. There are clearly going to be some further investments and, you know, hopefully there always will be to some degree. But yes, moderation would be a very clear expectation in Q3. And even potentially more so in Q4.

Andy Miller

But if I could add just one point to that if could. It’s very important that the 20% operating margin is not a financial metric that will affect the growth of our business because as we look at the OpEx headcount we put in in terms of either a high structured channel that is already on board. What we now want to create is not only that productivity ramp, but as importantly to get the HP, the Microsoft, the IBM, the key large partners to extend our reach in to excel that momentum.

So it’s a very well thought out plan in terms of how you build up the sales force, how you build up the channel, and then pause with that headcount addition and then move up the stack in terms of allowing that tightness of our partner community around POCN and our channel community.

So I think it’s a – this is not a financial plan to reach 20%, this is well thought out phase, strategy plan that is frankly moving exactly as we had planned out.

Bill Choi – Jeffries &Company

Okay. Good answer. Actually, one other thing. On HP revenue, Mike, for Q4, 16 to 18 million. I just want to clarify that you’re not including any, you know, Polycom product sales going through the HP channel in that 16 to 18?

Michael Kourey

That 16 to 18 million is based on Halo and Halo managed services.

Bill Choi – Jeffries &Company

Great. Thanks.

Michael Kourey

Thank you, Bill.

Operator

And our next question comes from the line of Mark Sue, RBC. Please go ahead.

Mark Sue – RBC Capital Markets

Andy, just on competition overall, any delay or pricing tactics from Cisco and also how do we get the Logictech and LifeSize combination. And also, if you’re looking at further consolidation opportunities?

Andy Miller

I’ll take each one. The first is, you know, we really saw nothing different in Q2 that we’ve seen in previous quarters from Cisco. Clearly they are our largest competitor na clearly we see the min most occasions. We saw nothing different in terms of delay tactics, in terms of more aggressive pricing competition, or really anything from the channel.

I think what we did see, on the positive side, is that we saw more other channel community coming to Polycom, come to Polycom in terms of trust, coming to Polycom in terms consistency, in terms of compatibility with their partnership.

So I think that we saw nothing different in Q2 than we’ve seen in previous quarters in terms of competitive pricing pressure or delay tactics. What we did see is we saw more former Cisco partners come into Polycom in terms of utilizing our technology, and as important, we saw more service providers come into Polycom to help illuminate the cloud, than previously.

So we actually saw it as some very positive momentum in the quarter as related to competitive issues with Cisco.

As it relates to Logitech LifeSize, we actually see that as a significant positive. I think it’s a great question. Two days ago we launched our small-to-medium business real presence campaign, which is a very focused phased campaign to make Polycom the leader in the small-to-medium business market, both in terms of premise based and cloud based.

I think that was a brilliant strategy to extend the continuum of our technology into the SMB market.

If you look at Logitec or LifeSize’s announce and what they did in the cloud, it’s not only – it’s non-compatible outside of the LifeSize areas. As a matter of fact, it’s not standard space, and it’s an island to itself. And secondly, they’re proving their own cloud. So they’re actually competing with the carrier now, something that we do not want to do.

So we see their competitive foray into the market as what I would call challenged. I think that our foray into the SMB market with real presence makes perfect sense and I think that will play out and we’ll be able to highlight that as we go on in the following quarters.

As it relates to continued…

I’m sorry.

Mark Sue – RBC Capital Markets

And maybe a consolidation, Andy. And then, Mike, a question for you. When we work backwards from your 20% operating margin targets, that implies a 10% sequential jump in revenues in 4Q, not unreasonable since you did it last year. Is that how we should be thinking about it this year?

Michael Kourey

I’m not guiding revenues for Q4 at this point, although, believe me, I understand the implicit guidance that does come out for Q4 here. It really depends on where we are in Q3 at the end of the day. So I’m absolutely not stating a number here for Q4 as far as percent of revenue growth, just for the operating margin line, of course the HPDC revenues.

But yes, I understand it implies some strong growth in Q4, at whatever level, based on Q3 actuals. And yes, that is conscious and implied in the guidance we’ve given.

Mark Sue – RBC Capital Markets

Got it, Mike. And then once we get to 20%, do you think you can do 22% for me?

Michael Kourey

I appreciate the way you phrase that and we’d obviously like to delight everyone on this call every time. In fact, clearly for 2012 and beyond expectation is we would be in the target range of 20 to 22% and that’s kind of a full-year kind of a guidance, as you know. But no, I’m definitely not trying to peg to one end of that or another. We’ve been talking about the 20% objective for quite some time and we’re very pleased that that is coming upon us.

Mark Sue – RBC Capital Markets

Thank you.

Andy Miller

We skipped your third questions, which was consolidation.

Mark Sue – RBC Capital Markets

Consolidation, yes.

Andy Miller

So I’d just thought I’d have a gentle reminder. As you have seen over the past several months, the acquisition of Accordin not only was a consolidation but it opened a total addressable market of $500 million. Clearly the Halo and Haven business from Hewlett Packard was further consolidation but also accelerated growth. So yes, we will continue to look at opportunities in the market to – not only to consolidate, but also to expand and build out our momentum. And that continuum that I talked about all the way to SMB to enterprise, to service writer carriers and cloud.

Mark Sue – RBC Capital Markets

Okay. Thank you, gentlemen, and good luck.

Andy Miller

All right.

Operator

And our next question comes from the line of Rohit Chopra with Wedbush. Please go ahead.

Rohit Chopra – Wedbush Morgan

Yeah. Thank you. Andy, I just want to get a sense on Microsoft last quarter. I think we talked about a 20% quarter-over-quarter growth. I just want to see if you could give us an update there. And then one other piece on Microsoft, there’s still a little bit of confusion out there as far as Skype goes. I just thought maybe it was an opportunity to talk a little bit about it and why it wouldn’t create some type of competition between you and your relationship that’s there already?

Andy Miller

Let me take the first part and I’ll turn it over to Mike for some of the metrics you requested.

You know, over the past two weeks, we have been intimately, not only involved, but participating with Microsoft at the Microsoft World Partner Conference in L.A. two weeks back. This week in particular in Denver at the Worldwide Microsoft sales meeting. We are as intimate and tight as we’ve ever been with Microsoft.

And the positive news out of the last couple weeks is now we have the entire Microsoft sales force that’s responsible for Link, not only framed on our technology, understanding on the competitive side of how to sell Link against some of the other competitors. So I believe that we are positioned better than ever with Microsoft in terms of our go-forward strategy.

We tried very hard on June 1st with [inaudible] and Paul sitting next to me to explain as best we could in terms of the Skype acquisition by Microsoft to fit it into the consumer side of life, and Polycom being on the other side at it relates to enterprise. And I think that has not only changed, but I think it’s become more clear, very clear within Microsoft executive team in terms of the power and the positioning that Polycom plays with their enterprise customers with Link.

So I am personally more confident than I’ve ever been with the opportunities with Microsoft going forward. And Mike, I think you had a couple metrics?

Michael Kourey

Yeah. The metric that you requested, I would repeat the same thing I said last quarter. And that, again, in Q2, it grew 20% plus Q to Q.

Rohit Chopra – Wedbush Morgan

Hey, Mike, one last thing. I just want to get a sense of the size of the sales organization and how much it grew sequentially.

Michael Kourey

We don’t break that out on these calls in particular. We did make some ads in customer spacing and in product development, those were the primary drivers during the quarter. And again, if we talk about the forward profile, yes, we will always make some investments, but we – the forward piece of that is moving behind us.

Rohit Chopra – Wedbush Morgan

Thanks, guys.

Michael Kourey

Thank you.

Operator

And our next question comes from the line of Sanjiv Wadhwani with Stifel Nicolaus. Please go ahead.

Sanjiv Wadhwani – Stifel Nicolaus

Thanks so much. Sorry to join the call a little bit late. I just wanted to confirm, Mike, on the HP side, it looks like the revenue’s skewed towards services, perhaps about 2/3s of that?

Michael Kourey

That is correct.

Sanjiv Wadhwani – Stifel Nicolaus

Okay. And the gross margins are generally compatible with the corporate Polycom average, or they’re a little bit different?

Michael Kourey

They’re a little bit different. They’re not as high as the Polycom corporate average. Our organic gross margins, for instance, for Q3, we expect to be – remain the same at around 61-7. And that’s the guidance we gave. And then we expect with the HP stub, the HPVC stud of two months and maybe a couple of days here we’ll see, we would expect the overall blended gross margins to be 61%, in the exact middle of our range, which as you may recall, is the way we’ve guided all of – on these calls for gross margins to be in that midpoint.

Overtime, we might say you’d be able to make some improvements there. Way too early to commit. It’s not even closed yet. But clearly, we’ve done an extraordinary job on our services revenues and on our product revenues as far as driving GM. And that will clearly be an objective with the acquired entities as well. But that’s the current state of affairs.

Sanjiv Wadhwani – Stifel Nicolaus

And just the HP, when you’re looking at the growth of that piece, are you expecting it to pretty much grow in line organically with Polycom or is it going to be a little bit of a slower growth element over there?

Michael Kourey

No, we actually covered that earlier in the call. Yes, we expect it to grow in line in 2012 with the rest of our core business.

Sanjiv Wadhwani – Stifel Nicolaus

Got it. Okay. And then, Andy, quick question on Cisco, you know, your comment about channel partners migrating more towards Polycom. We’ve found that too. I’m just curious, is that because they’re getting better margins from Polycom or are there some other dynamics in backing that shift?

Andy Miller

Well, I think it’s a few things. I think we do offer the opportunity for a better margin opportunity for the partner. I think we offer the partner a more comprehensive certification and training opportunity. We offer the partner a broader geographic and vertical market play than that of Cisco. And frankly, I believe that from a loyalty factor, that we behaved in a manner that’s been extremely consistent as recent as our team Polycom Event on April 1st. From that, even to where we sit today on July 21st, we’ve seen increased opportunity and momentum in the market. And it’s very important to understand, as we talk about HP, and we talk about Microsoft. We talk about IBM, it’s all those partners that we’re pulling through with those POC partners. So we’re not talking about a bifurcated traditionally Polycom-Cisco partner. I talked about that, loyalty, improved margins, greater channel coverage, great geographic reach.

But now we’re also talking about giving those partners the opportunity to participate with HP, with IBM, with Microsoft, with Juniper and others. So it’s a much larger pie for these Polycom channel partners to participate in and I think those ingredients are adding up to, I think what each one of you is hearing back from the street.

Sanjiv Wadhwani – Stifel Nicolaus

Go it. All right. Thanks so much.

Andy Miller

You’re welcome.

Michael Kourey

Thanks, Sanjiv.

Operator

And our next question comes from the line of Stephen Payton with Gleacher and Company. Please go ahead.

Stephen Payton with Gleacher and Company

Hi. Thanks for taking my questions. Can you give us some additional detail on your telepresence sales and to what extent it’s helping you pull in larger deals including infrastructure and room systems and whether we’ve hit the $20 million mark at this quarter on telepresence?

Michael Kourey

We have not, as yet, hit the $20 million mark in telepresence, but I think Andy can talk about this dynamic in pulling through the rest of the business.

Andy Miller

Sure. Clearly that’s a mark that we intend to hit shortly. We see that the OTX technology and the RXP technology are large and emersed in telepresence are growing at a very – very nice rate. The beauty of those systems is they pull through not only network infrastructure or UCIC, but we’re seeing more and more – you have to understand, typically those are the first deployments. These typically start at the executive or the board level from immersive telepresence and from that you have to have the intelligence core to be able to do the multi [inaudible] and all the feature functionality and link integration.

What we’re starting to see now in the larger dollar amounts is the high definitions being a component in part of a much more elongated sale. Some of the references that I talked about today as it relates to some of the key wins are frankly all large telepresence immersive opportunities that have now grown into additional core additional HDX and we’re starting to see actually mobile applications on top of that.

So it’s been a great anchor. It will continue to grow to reach that mark shortly, and it’s a great competitive weapon because we have a far superior product than our competition, and the ability to pull through additional product, and also to integrate with Microsoft Link and IBM [inaudible]. so all of that together is played out nicely in terms of our traction.

And I just want to add one more point that I think is very important because we haven’t mentioned it on this call at all today. If you look at A Pacific, which now makes up 24% of our company in Q2, the telepresence sales that are coming from China and India around immersive telepresence are stellar in terms of the trajectory and the dollar size that we’re pulling through. Q2, we had a $2.4 million transaction in Australia, key telepresence wins in India and key telepresence wins in China.

So the A-Pac theater is really leading the company was we lace to immersive telepresence, and we’re starting to see much larger deals occur, and that’s all good new.

Stephen Payton with Gleacher and Company

Thank you. And a follow up if I could. Can you give us a sense of how much Accordin is attributing to revenue, what you’ve been doing to cross sell and up sell to that customer base? And also, what other opportunities do you have to sell software oriented features and capabilities that you might not be addressing right now?

Michael Kourey

Let me start and then have Andy finish. Accordin is, obviously contributing now very strategically to our process at the UC Intelligent Core as a standalone it’s setting apart what it will pull through. As a standalone, as you know, it’s a relatively small piece of business. But it’s doing well.

I think as far as stragegically how that can be parlayed over time, Andy can address that.

Andy Miller

Okay. One of the premises of the Accordin acquisition was software, and it was also the integration with Microsoft. So we are seeing literally on a daily basis the extended of sales team of Polycom now being trained and certified on the Accordin technology. So we’re starting to see every quarter, actually every month, and record some good traction. And what we love about that is the software aspect and the tie-in with Microsoft. So I think we’ll see that, and in Q3 and Q4 we’ll actually be talking more about how the Accordin is being used as pull through and leveraging larger opportunities in the software perspective.

Stephen Payton with Gleacher and Company

Okay. And are there other similar opportunities to sell software oriented functionality that you’re not addressing right now that might be accretive to gross margin and pulling through greater sales of your other solutions?

Andy Miller

Well, as we’ve always talked about in the last several calls, we are very focused in driving Polycom become a software company. And I think Accordin is one example. Clearly, mobility in terms of porting our telepresence software onto nobel platforms is another example. And I think probably the most beautiful example is the cloud. The ability to take Polycom software technology, port that onto service rider and carrier technologies to be able to frankly illuminate what we call video as a service, the very analogy of software as a service.

So absolutely every day we are looking at opportunities of how to take our software and port that on other appliances to not only improve revenue growth and gross margin, but to improve that continuity into other aspects of the market. So absolutely.

Operator

And I will now turn the call back to you, sir.

Andy Miller

Great. There are no more questions. I appreciate everyone joining us today. I’d like to say in closing that I’d like to thank you again for your continued support of Polycom, and have a great afternoon. Thank you.

Michael Kourey

Good bye, everybody.

Operator

Ladies and gentlemen, that does conclude today’s conference call. We thank you for your participation and ask that you please disconnect your lines.

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