Laura Graves - VP, IR
Andy Miller - President & CEO
Mike Kourey - CFO
Sudhakar Ramakrishna - EVP, CDO and General Manager, Unified Communications Products
Jim Suva - Citigroup
Jeff Kvall - Barclays
Jess Lubert - Wells Fargo
Rohit Chopra - Wedbush
Polycom, Inc. (PLCM) Annual Analyst and Investor Conference Call November 7, 2011 11:00 AM ET
Good morning everyone. Please allow me to introduce myself. This is Laura Graves and I am Vice President of Investor Relations here at Polycom. I would like to welcome everyone. Welcome to our Annual Investor meetings for 2011.
We have many investors who have joined us here live in our New York City office along with many more in our executive briefing center in Santa Clara, California, thank you. And a special welcome to those of you who are joining us via webcast today.
I would like to introduced to Polycom executives who are with me today. Joining me in New York will be Andy Miller our President and CEO, Mike Kourey our Chief Financial Officer. And joining us from Santa Clara location is Sudhakar Ramakrishna, Executive Vice President and Chief Development Officer and general manager of our UC products group and inlay that many of you have met before our Chief Accounting Officer Laura Durr.
Before, we begin I would like to remind everyone that we will be making forward-looking statements today. Such statements due contain risks and uncertainties regarding future events. For a detail listing of these risks and uncertainties, please refer to our most recent 10-Q as filed with the SEC. Also we will be making reference to both GAAP and non-GAAP financial measures here today and a reconciliation of those can be found either on our website or for the webcast at the end of this presentation.
All lines will be in mute while we do the presentation part here today and then we will open it up for Q&A. Thank you again all for joining us here this morning and we look forward to a good meeting and with that I’ll turn it over to President and CEO Andy Miller. Thank you.
Great, good morning and good early morning to everyone in Santa Clara. It’s a pleasure to have you for our 2011 Annual Investor conference. This morning we would like to give you a very, very thorough look into the business at Polycom and I would like to start off with the agenda that we’ll be following today between myself, Mike and Rama. We are going to walk through the drivers in the market and the opportunity both in terms of the total addressable market and the growth rates that we see out through 2015.
We’ll be giving you a look at our solutions roadmap that encompasses both the (inaudible) space and cloud initiatives at Polycom and growth drivers in the industry. The ecosystem leverage around our Polycom open collaboration network and our go-to-market strategy and then Mike will conclude with our operating performance and as Laura stated we will go through plenty of time for Q&A as we go through the next two hours.
To reiterate our ambition at Polycom, is all around making our technology available to hundred of millions of people to use video collaboration as their preferred method of communications, easily, reliably, regardless and agnostic of network of carrier, about location or device is our value statement in our company vision.
As you look at Polycom as a glance, we’re on a $1.5 billion runrate in 2011. Q3 with 23% year-over-year growth rate, Q3 non-GAAP 32% year-over-year which is 55 quarters of positive cash flow. As it relates to industry leadership, we have over 65 million lines of code and over 700 patents that have either been issued or pending. From a customer momentum perspective, we have over 400,000 customers and in fact 96% of those are in Fortune 100, 91% are in Fortune Global 1000 and  % are in the Fortune 500.
Let’s take sometime and look through the market drivers and the opportunity at Polycom. We’ve actually five value drivers in visual communication and this is how we are building our business model and as I talked in Q3 earnings around the monetization of mobile, cloud and social media, it varies to understand these five business drivers.
First is the mobile device proliferation. As you can see there are 64 million tablets in place today and that will grow by 2015 to 320 million I’m going to talk today about how we intend to monetize that growth of mobile devices through Polycom’s RealPresence Mobile.
Secondly of network readiness, our technology will work over 3G, 4G, Wi-Fi, LTE. So the networks that are available today globally are ready for Polycom RealPresence technology. The fourth and as I state for almost a year and half now, if you look at Gartner’s projections of 2012, 40% of all our technology will be delivered in some type of hybrid or managed service or cloud model.
$41 billion in cloud technology today growing by $241 billion by 2020. It is a great opportunity in this industry both in consumer, small-to-medium business, enterprise and carrier for cloud delivery. We will talk today about our growth trajectory and how we intend to monetize the cloud. The fourth is all around social connectedness. There are 800 million users on Facebook, a 140 million users as it relates to social collaboration will be video enabled by 2015. This goes for elements which are Jive, Twitter, Google, LinkedIn etc.
We’re going talk today about how we intend to monetize and our investments in terms of social media. As since it’s all around the generation that is currently and will be raised on video, 3 billion videos are viewed on YouTube, 66% of those will be done on mobile in 2015.
So as we think about our business in terms of where the growth factors are, where we intend to invest is all round mobility, the network, the ability to offer a CPE or cloud based service, the monetization of social media and gearing our businesses for the next generation of workers in our global growth trajectory. This is how we’re building our business.
Now, let’s take a look at opportunities in terms of total addressable market and compounded growth rate. Let me walk you through the opportunity for Polycom, so we all clearly understand each one of these elements.
In 2011, there’s a $3.6 billion market opportunity and that’s divided in terms of our current products. Group Systems, network infrastructure and UC personnel. As we look out to 2014, that market growth of $5.7 billion, with a 17% compounded annual growth rate and a clear expansion of Polycom’s total adjustable market.
Now, if you look on top of that and layer on top that, the cloud opportunity. That is a 31% compounded annual growth opportunity and increases our TAM by up to 35%. This includes items such as Video as a Service, hosted and managed video. So, we talk about cloud at Polycom, we talk about the migration of our customers from [premise] stage to managed, hosted or cloud, a very fast growing market, not only in terms of our compounded annual growth, but the total adjustable market to $7.8 billion.
Layer on top of that, the opportunity to now become involved in social collaborations. It increases the total adjustable market by greater than 60% and moves the opportunity for our company, not only in terms of 24% compounded annual growth rate, but now to an $11 billion market opportunity by 2014.
And finally, if you lay on top of that, mobile, which is what we’ll talk about today in terms of Polycom’s mobile strategy and how we intend to monetize that. The great opportunities in terms of revenue expansion and as you can see $6.5 billion market in 2015 to $11.6 billion market. We feel that blended compound annual growth rate of 22% is achievable and it is important for us to walk through each one of these areas specifically that are new to our industry in Polycom around mobility, around cloud and around social media.
Now let’s take a step back in terms of how we intend to be able to monetize and achieve this type of growth rates and opportunity for our company. In 2011, we laid out a clear set of strategic initiatives that we were going to be focused on building out the cloud-based initiatives through our carriers and our partners. In fact in 2012 that continues to be a key initiative for Polycom as we move into a reality of managed, hosted and cloud-based services.
I’ll give you some very specific customer examples of this not only initiative, but the reality of true customer’s examples that are in place and growing from Polycom today. In 2011, mobility was a clear imperative. That will be another clear imperative in 2012, because now that we've launched the RealPresence mobile application, we start to monetize that. We can start taking that type of mobility application to other pad and smartphone providers and also expanding our reach into the carrier community either Tier 1, Tier 2 or Tier 3.
The 2011 ecosystem was a key strategic priority for Polycom. And in fact in 2012, I’ve added the word focused, and I am going to walk you through what I feel are three most strategic partners, IBM, Microsoft, HP and we’ve added a fourth which is Apple due to the proliferation of iPad 2 and mobility technology. I’ll walk through each one of those and what it means to Polycom and where we are with Insight each one of those partners.
In 2011, network infrastructure and the innovation engine with Insight Polycom specifically around mobility, software, cloud and social media were all part of our investment pieces. In 2012, as I’ll walk through today, our Polycom RealPresence platform now incorporates each one of those elements that we set out in 2011 to provide.
We’ve also added in 2012 social collaboration; I’ll walk you today where we are in that model and also importantly how we tend to monetize and expand that model and finally, in 2012 the strategic imperative of services. I’ll walk you today the key elements of deployment services, consultative services and our more merging opportunity to grow our services revenue and gross margins. These 2012 imperatives for how we’re building our business model and where we are making our investment and we’ll carefully walk through each one of those with you.
I would now I like to take a step back for a moment and share with you our focus around platforms to end-points. We’ve talked on June 1st and set out the strategy of Polycom becoming a software company migrating from a hardware company. And I am pleased to announce the Polycom RealPresence platform is in place today. And I would like to share with you a little bit about why that is so important for us.
If you look at your slide on the bottom layer you’ll see core networking and security. We call that the architecture and the plumbing required to offer video collaboration and high-def all your applications. Each one of the other five elements above the network infrastructure layer is how we sell our technology today.
Universal video collaboration, video resource management or virtualization management, security and universal access in our video content management. This is how our sales teams started to begin to sell a solution rather than plain products and each of those five elements have a service strategy associated with them. We feel strongly that as we go into deployments around Microsoft Lync, IBM Sametime, interoperability elements with other partners that services’ becomes a key and strategic facet of Polycom’s growth, not only in terms of revenue, but in terms of gross margin which will offer leverage and expansion of operating margins.
If you go back only a year ago, we offered a fixed service and one what I call enhanced service totally. Today, we have a menu opportunity to deliver deployment opportunities that are consultative, next generation cloud-based and integration and interoperability specifically around Lync deployments. So we feel very strongly that we’re on the right trajectory and path for revenue growth from these services.
Now let me tell you in the most easiest manner and most simplistic manner how we articulate our technology to our customers. Rather than being in poly product company, we now walk into a customer and talk to them about how we interoperate with high presence, how we interoperate with call control platforms, how we interoperate about leading web conferencing platforms in the industry, offer the best-in-class video collaboration, best-in-class mobile strategy and also a very unique and innovative way to approach social media.
Each one of these new icon is how we now sell our software platform which is known as a RealPresence platform at Polycom. If we can tell the story correctly, from a CIO perspective, this is the strongest portfolio of products and solutions in this industry. And I’ll share a little bit about each one of these icons, we’re partners that we interoperate with and how we deliver this.
It’s important to understand how we offer our technologies through the channel. Many of you know from a Polycom perspective we offer our products and solutions to what we call high-touch and selective distribution. Traditionally, it’s been through VARS service providers, you know Tier 1, Tier 2 or Tier 3 for our distribution partners.
Tomorrow, they will be offered to those same carriers and the same partners, but we will actually offer this move that we call a Polycom cloud. We will be able to take advantage of the acquisition of the HP Digital Communications Group with the HVEN Network to be able to launch a Polycom cloud or video as a service through our service providers. We intend to take that technology, white label it and provide it to the partners to be able to launch and accelerate cloud delivery before any other solution provider in this business and we intend to take a leadership position in Polycom cloud or video as a service.
In conjuncture with that, we’ll be offering mobile applications and social media applications, as I said before, agnostic to the internet application whether its 3G, 4G, Wireless or LTE.
The next generation which will be in 2012, will be a true Polycom cloud. This will be branded through the service provider ecosystem offered by Polycom; we’ll be delivering to both SMB and enterprise customers. So to make it clear, in the near future we will be taking the HVEN technology, we will be illuminating that and white labeling it to our carriers to allow them to get up to speed very quickly to be able to deliver Polycom branded cloud to our customer base.
In 2012, we will go then above that to a Polycom cloud supported by Polycom RealPresence technology through our Tier 1, Tier 2 and Tier 3 carriers and service providers offering a Polycom branded cloud to our carriers. So we are investing in cloud; we are serious about cloud and we believe we have the best opportunity to lead the industry and provide agnostic choice to our customers either simply e-based, hosted or managed, Polycom branded cloud and then finally a full ecosystem through our carriers around cloud. So this evolution of our channel model is very important to understand where we are today, where we will be by the end of 2011 and how we see our business transformation occurring in 2012.
I would now like to talk for a moment about our North American execution. As I talked on Q3 earnings, we have made changes and an evolution of our management team in North America. This was not a knee-jerk reaction, this was well thought out for the last two quarters. We have been able to recruit and evolve our North America management team to be able to carry forward not only our business model, but also be able to talk in best-in-class around our go-to market strategy, our cloud evolution in our software model.
We’ve put in place a best-in-class Senior President in North America, four area Vice Presidents, three of which are on board today and one which will be on board by the end of the quarter. We have re-aligned to be more high-touch focused. This does not mean that we are at all diluting our channel focus, we are just being able to re-align to have more specifically in North America, more high-touch focused in NFL cities to better communicate not only our story but to compete and win against Cisco.
We will continue to optimize the channel and use our telesales group to manage channel partners that are sub $5 million and continue to high touch with our key channel partners in North America. We also are going to manage North America in terms of a bookings methodology and invest as we see each quarter booking growth. We feel more confident than ever about the management team in North America, the trajectory in North America and our focus in terms of regaining market share in North America.
As a great example of investments that we've made, that have fared very well is our US Federal team. As I sat here two years ago, we talked about our investment in Gen X certifications. I am pleased to talk about that in Q3 we had a 120% Q-over-Q sequential growth of nearly 40% year-over-year. The investment is just in beginning phase.
We’ve now been able to certified what was they call Gen X certifications which is now call UC APL certifications. We have a new headquarters in Herndon, Virginia, excellent Department of the Defense coverage and very slow systems integrated relationships with companies like Minor to [Jupiter] Science Corporation, Northrop Grumman and (inaudible).
And there is, in this Federal marketplace a share shift that is taking place from Cisco to Polycom. We saw very strongly that the areas that we haven’t invested like Federal are starting to bear fruit. Additionally in emerging market, we feel that we are taking first mover opportunity in advantage in these key markets.
Collectively if you look at BRIC in emerging to what we call growth markets, they grew 58% year-over-year in Q3, and now make up 24% on a consolidated revenues for Polycom. The integration of the age specific with a Latin America market led by Hansjoerg Wagner who has been so successful in Polycom Asia Pacific. We’ve done this because they have similar key competitors in similar financial models in terms of our competitors and our core customer base.
So we feel very, very strong with the investments that we’ve made in our growth areas, are still in the emphasis phase and have high opportunity in terms of leveraging that growth model.
I would like talk to CIOs in our entire employee base, talk to CIO’s everyday. There are seven very key focus areas of wide customers who choose Polycom. One is ease of use Second and probably most important is our approach around open standards in true native interoperability, not interoperability through a gateway and not cloud wide open standards but full open standards interoperability. This is what CIOs want and demand.
Thirdly, our opportunity to provide the best total costs of ownership. Third-party results certify that Polycom uses between 38% and 50% less bandwidth than our closest competitors. When you look at total cost of ownership which is 70% in a network, this is a very meaningful and strategic differentiator for Polycom.
Fourth, is backward and forth compatible. Our ability to work on 323 standards, shift, SEC, HT65 and next generation standards to be able to go back to solve dates is critically important specifically as it relates to next generation software.
Fifth is an entire broad range of solutions. Our continuum from all the way from the mobility, social media, small-medium business, enterprise carrier, is the best-in-class in this industry, and our approach in terms of our agnostic approach in terms of how we look at mobility in social media rather than a dedicated platform are what we call bring here on device is resonating very strongly with the CIO community.
Sixth is our enterprise level security and our resiliency and scalability. I’ll give you some examples of five key customers that have made decisions around just the facet of security, expandability and of our migrations to next generation software platforms.
And finally our ecosystem, which I’ll spend a moment on very clearly walking through where we are with Microsoft, IBM, Hewlett-Packard and Apple specifically. If we correctly walk through each one of these key strategic differentiators, specifically against Cisco we can win every transaction, if told, appropriately because this technology the interoperability, the integration is best-in-class.
Now how do we compete to win? Let me share with you five very specific customer examples recently in terms of where Polycom has won against our largest competitor. The first is ebay. Ebay actually has Cisco. They have Avaya, they have Microsoft but it shows Polycom mainly because of the key word which is interoperability. They have a number of, as I said before, preinstalled solutions that take in the RealPresence software, allow them to avoid ripping every placing from an upgradability perspective and allows to be in a trusted relationship.
This is a great example of our RealPresence platform operating as a Trojan horse and being inserted into one of our largest competitors account. Second example is ICBC, the largest bank in China and actually the seventh largest corporation of the global 2000 worldwide. This is a largest cloud deployment of video conferencing in the world. The reason that Polycom was chose was because of its reliability and redundancy. There were 2000 sites within ICBC and the scalability in terms of concurrent sessions or end points was the requirement, ICBC put, would I believe Polycom and its competitor’s to the most intense lab test ever in history of this technology and industry. This is not only a hallmark account for our company, but again, the largest cloud deployment which is continuing to involve in the world.
Third is the Canadian Department of Defense. This is all around choosing Polycom because of security. They have a mix end point environment and they standardize on the RealPresence platform due to our scalability, our service offering and our cost effectiveness as a solution.
Next is NASDAQ. This is a great example of going in with Microsoft, data integration interlink and being able to upgrade our technology to be in tandem with Microsoft like deploy a best-in-class solution, one of NASDAQ’s criteria was open standards and they chose Polycom as a leading technology platform.
And finally, [F5] Networks based upon a very clear, methodical Return on Investment and total cost of ownership. There might be face-to-face experience, improved efficiency and the utilization of (inaudible)
So, as you look at each one of these key wins for Polycom, each one was very different. interoperability, reliability and redundancy, security, native integration interlink, and ROI and TCO.
These are hallmark accounts and not only accounts for Polycom, but these were also accounts that were led by a large competitor; well that competitor was displaced with Polycom Technology.
So, as I conclude around our growth strategy, the core UC market is the fastest growing market within IT spends. We feel with our ecosystem partners, with our best-in-class platforms, with our software strategy that now includes mobility and social media, we are uniquely positioned to evolve in this ecosystem.
We think strongly that we have factual opportunities continue our growth in BRIC, additional emerging markets such Central Africa, Middle East and markets such as US Federal.
If you understand the TAM and the expected compounded annual growth rates around the cloud, mobility and social, they create an excellent opportunity for expanded total addressable markets for our company. And we think that we are just in a very, very early stages of our leverage around our relationships with IBM, Microsoft and Hewlett-Packard and in a few minutes I will walk you through each one of those in detail. And I feel strongly, better than ever, in my tenure at Polycom that we have the best management team in North America. We will continue our commitment to evolve North America in terms of market share gain and leadership with this, [the evolve] team in North America.
With that said, I am going to turn it over now for a moment to Sudhakar Ramakrishna, our Chief Development Officer at Polycom. Rama?
Rama, we don't have audio. They are going to unmute. Just wait for a minute please. There you go. Thank you.
Okay, thanks Andy and thanks everyone for joining us today. Andy laid out the key drivers that are causing the excitement that we have at Polycom as of late to all future prospects, and what I will touch on today is how are we placing our investments from our product and solutions standpoint, and what are our key priorities as it relates not only to the products portfolio but also the services which was a key imperative that Andy laid out for 2012 as well. So Andy, if you can just click twice so that I can have the complete picture here. So we are focused on both, expanding our current market segment as well as forward investing in some of the key growth areas that Andy highlighted. The base business that we have, which is the UC Personal Systems, Group Systems and the RealPresence infrastructure is also growing significantly in the marketplace. And as Andy described, more and more customers are requiring multi vendor support, be it for investment protection, reasons be it for the way that they’ve expanded or be it for some special applications that some of the vendors provide.
So we with us innovations, in our RealPresence platform and our unique devices and experiences are able to offer those solutions to our customer. So in terms of maintaining our current growth engines, we’re focused heavily on improving and expanding our portfolio as it lays to devices and experiences because there is significant market opportunity there, but there’s also a key focus with regards to manageability and scale resiliency and virtualization because visual communications is becoming more and more mission critical for our customers and as the number of customer types increases, as the deployment price increases, as a vendor committing ourselves to interoperability and standards, as well as delivering superior TCO require us to support great manageability and experiences.
So that is our key thrust as it relates to maintaining our growth rate. In terms of expanding our growth rate, using the same basis of our RealPresence platform, expanding it through software, providing the right API’s and integration points into carrier networks, into other clouds service provider networks, and then complimenting it with a very rich service enablement’s strategy, be it the link deployment in the large enterprise or be supporting a service provider. Those are key focus areas for us going forward in terms of how we expand our addressable market and growth.
And three, leveraging some of the investments that we’ve made recently with ViVu and acquisition that’s we’ve made with [Atrain] that Andy referred to. We’re working not only in the cloud space, but integrating collaboration engines, specifically in verticals such as finance, healthcare, call center and others. So that’s how we plan to expand the market and create a decencies, the top east of pie that Andy referred to in terms of expanding our total adjustable market. So that’s where our investments are going and I’ll talk through the roadmap in a second.
Just to quickly touch on some of the 2012 and ‘11 innovations along each of these dimension. We spoke about our total and complete commitment to standard and interoperability. Here we have differentiated and distinguished ourselves through our native integration of link by being the video and visual communication supplier to IBM as well as building technology such SPC and implementing them in a manner where interoperability comes from day one as oppose to building another island in the customer’s network. Those are all unique innovations that are complete commitments to standards and interoperability.
On the [access] side, we recognize that are going to be multiple forms of [access] that [Hudson] has won, whether it’s Wi-Fi and wireless or other LAN-based technologies on one hand or cloud-based delivery as a way to access services. On the other hand we plan to support our solutions in a completely seamless fashion. Here’s where the BYOD support. Here’s where the ability to involve our RealPresence platform and integrate it into the HVEN network and offer wide-level cloud-based services or branded services through our service providers come into play. The uniqueness I want to highlight here is the same RealPresence platform forms the basis for all of these solutions and are focused on delivering great dividers and experiences, allows us to be access agnostic.
In the applications space, we are focused on both, real time and non real time collaborations. The acquisitions that we made with Accordent allows us to get into the non-real time collaboration aspect where we’re able to continue collaborations regardless of time and distance boundary, where you’ll have a conversation or a visual collaboration happening today, but that can be picked up at a different place tomorrow and continued on without loosing any context. So that is in our focus area from the stand point of enabling people and users to communicate more effectively, collaborate more effectively and therefore be more productive as well. So, those are three dimensions from a investment stand point. And on the experience of side, it’s all about making it simple, it’s all making it intuitive both, for the IT administrator as well as to the end user.
Next slide, Andy, with regards to the RealPresence platform, we are making it inherently cloud ready. This does not only mean that we will deliver it to service providers. In fact, a lot of large enterprise customers have asked us to create a cloud-based delivery model from the RealPresence platform because they have multiple departments that they serve. They have a need to organize their investments more care fully and many of them have grown through multi-vendor environment and therefore having the assets consolidated, providing the right levels of API, such that we can integrate, let’s say, into the enterprise management systems on the enterprise side, or carrier OSS and BSS systems on the other hand, and provide an inherently virtualized software through the RealPresence platform is key. And so this is a key area of focus and investment for us going forward. Next slide Andy?
Andy touched on the mobility aspect. This is another prove point of our ability to deliver innovations through software. What we did here is we took the software that runs on our end points and devices and we essentially courted it in a seamless fashion to a broad range of fabulous, compacted, and you may have seen Andy’s key note at the [PTIA] where we did a simultaneous launch on the Apple iPad 2, the Motorola Zoom and the Samsung Galaxy Tab.
What customers have shown us is that using an ability through software, to provide multi-party conferencing capability, multi-party collaboration capability, but leveraging the existing platforms that they have is a key important and imperative for them.
So they don’t want us to deliver another platform as in another tablet to them, as much as proliferate our software on as many tablet form factors as possible for them. And so what you will see from a investment and future roadmaps standpoint is more along the same continual.
Next, I will touch briefly on the solutions and the services roadmap. As I mentioned, we continued to demonstrate significant strength and investment in expanding our current markets so the top of the chart here is where you will see us continuing to innovate in terms of our codecs, in terms of our devices, in terms of our software.
Andy made a reference to forward compatibility. A lot of the devices that we are building and codecs that we’re implementing have forwards compatibility in mind as in what does it take for us to support future protocols that might emerge, what computing capabilities might be required and so on and so forth. But we are investing in innovating from a forward compatibility standpoint.
The RealPresence platform, the ability for us to continue to innovate with API’s adding virtualization capabilities, multi-tenancy, those are all key priorities.
Next, I briefly touched on the ViVu acquisition. We are very excited about it from the standpoint of, it gives us the ability to integrate our capabilities into vertical application, be it into financial sector, be it into the healthcare sector or call centers. This is a way for us to deliver social collaboration in the enterprise and there will be more investments along the line as it relates to expansion from an API standpoint and also integration into other social collaboration engines going forward.
Manageability will be a continued theme all across because as I said the complexity of deployments increases and therefore we as a vendor have to simplify those by providing truly compelling manageability solutions that improve the TCO of our enterprise customers as well as the scale of our service provider customers.
And last but not least, we’ll continue to innovate with software on the device side with regards to expanding our mobility from factors embedding our software in multiple applications such as link, at the same time and others on a go forward basis. So those are the investment themes from a product portfolio standpoint.
Next slide, Andy. With regards to services in addition to care/support services, we are focusing heavily in terms of what we call advanced services and in some cases product detached services. These are services that we would sell even before a single Polycom product is actually installed at a customer site, for instant network assessment before anything is deployed. What is the take for the customer to deploy a world-class visual communications, vision collaboration solution. Those are all aspects that we have focused on, adoption services as in how do we increase the adoption of visual communications and show leverage and ROI to a enterprise customer. These are things that we are focused on right now and have solutions and offerings in the marketplace.
Additionally, with regards to our relationship with Lync, I should might be Microsoft Lync and IBM Sametime, we have specialized practices within the organizations to support installation and optimization of these network. And finally we are supporting capabilities such as the remote monitoring and remote manageability that are consistent with our cloud-based delivery model approach and that are consistent with supporting larger networks for service providers and others.
I leave you with the last slide here which is a glimpse of how continue to innovate out into the future. While we are focused on visual communications, while we are focused on real time communications, we see tremendous opportunities to bring the trends in mobile, the trends in software, the trends in cloud, all together to deliver conversations that are for consistent across time and space boundary.
So you think the technologies that we have, whether it’s ViVu on hand according to other hand, but all powered by the RealPresence platform, we are able to create consistent conversions that enable things to collaborate better, communicate better and be more productive. And some of the things that we have here which is voice, video and content, these are our core competencies.
Using partnerships we are adding analytic, we’re able to store conservations to retrieve them at any point in time, broadcast communications as well as innovate in a distributed fashion. We are enabling enterprises and service providers to innovate in a distributor fashion through our future software innovation.
So just wanted to give you a glimpse for how we are evolving to a software company and how we are enabling users to leverage the mobile social and cloud option from a delivery model and from a technology expertise standpoint and we believe that Polycom’s portfolio is best suited to be able to do that. With that short presentation, I’ll turn it back to Andrew.
Great, thank you, Rama. And it’s a very important to understand the transformation of Polycom as it relates to deploying products that are perceived to be hardware based through our software evolution and how we have made investments and we intend to make investments that will allow us to not only become more software, but focused on cloud, mobility and social as we build out our continuum of products.
And now I’d like to talk for a moment about what I call ecosystems leverage. Several slides back, I presented the RealPresence platform. With the core networking being in the green, the RealPresence platform and then as I said before accompanied by a services portfolio.
Each one of these blue icons Presence, qual control, web conferencing, video, mobility or social, each has a relationship with several key strategic partners. On presence, our relationship with Microsoft Lync, IBM Sametime, our native integration into qual control platforms either Microsoft, Siemens’ OpenScape, BroadSoft, even Cisco CallManager and via or platform. The integration in the agnostic approach to be able to interoperate with these is very important for customers rather than rip or replace to integrate and interoperate. As it relates to web conferences specifically with the ViVu application, we are now able to integrate with definite clouds webconferencing platforms in the market today.
From a video collaboration perspective, Microsoft Lync, IBM Sametime and with our interoperability with TIFF and our commitments in open standards, we’ve now opened up a cluster of opportunities to participate in mixed environments and as I gave some of my customer example such a eBay for an example, the ability to be able to go ahead and interoperate in a mixed environment is something new and leadership opportunity in our industry. From a mobility perspective, we’ve talked about Motorola, Apple, Samsung with the other platforms introduced in Q4 and Q1 2012.
And I also wanted to talk for a moment about Ericsson and Juniper, because it is not only the tablet or smartphone manufacturing, it’s ability to offer IMS applications and functionality, the ability to integrate with Juniper on the Junos platform to offer a best in cloud bandwidth and management control. So our partnerships from an ability familiarity perspective are critically important.
And finally social as we’ve just introduced our first social application with Jive we are working closely with IBM, with Microsoft, with other key social providers whether it be Sametime, Google, LinkedIn and others to be able to what I call an illuminate shack to be visually enabled to allow people to communicate visually over chat and this is a very important element of the business going forward. I’ll talk in a moment about how we monetize. So it is very important to understand that as we look in our platform with these fixed what I call kernels, how we actually can attribute key partnerships, that will extend our reach are critically important as we move to software and as we move to industry leadership.
We’ve talked a lot going back to on this a year and half ago, about what I called the Big Seven. The Big Seven partnerships of Polycom open collaboration network, so we have done a great deal of work over the past two years around how to not only modulize, but enhance these relationships.
And I have broken them down on the left, around strategic alliances, service provider, or social media partnerships. And on the top, I’ve talked about value proposition, mutual interest, planning commitment, initialize revenue and expand. And I’d like to give you just a key example of what are probably most important to our company in terms of leveraging this very unique and very differentiated ecosystem.
As we look out plan and commitment, our relationship with IBM is in the very early days. And I will share with you in a moment, a plan in terms of how we are going to go to market with IBM in the GTS Group, co-research and be able to integrate our applications into IBM same time and differentiate us as a market leader.
As we look at Hewlett-Packard in terms of initializing revenue, we’re in the very, very early days of our relationship with HP. As you remember, it was just launched on June 1. We’ve been working carefully with HP in the go-to-market, the resell community and the channel community, to be able to expand these revenue opportunities. So, with IBM, and with Hewlett-Packard, very, very early in the opportunity to leverage their channels and their direct and high-touch sales and organization to be able to take our revenue model to a very upward trajectory. And as it relates to expand and to take the great opportunity that we have in place with Microsoft and continue to leverage our opportunity around Microsoft Lync.
And service provider, we’re just at the very early stages of our relationships with Telefónica, Orange, Softbank, Vodafone and in a very early extension of our relationships with AT&T, BT, Verizon and Telstra. Additionally, very early in our relationships in terms of Zebra which was announced yesterday, from starting Friday, our relationship with (Joyce), our relationship with tibbr, with the ViVu acquisition in terms of integration and our mobile platforms, Motorola, Samsung and clearly a mutual interest around Apple. So what I wanted to make sure that everyone understood is that we are in the very early days of these relationships and collaboration network ecosystem leverage.
I want to share with you in a moment about little bit of detail about each one so you can see where we are with inside the specific company and how we intend to leverage those opportunities. But we've come a significant way in terms of what we call the big seven around Polycom open collaboration network. We've expanded that to strategic alliances, to carriers and to social media platforms.
So now let's take a look at each one of those critical alliances. From a Microsoft perspective, we have built and delivered scalable video codec software to Microsoft which would be embedded in their late client to provide high definition video and audio in Q1 of 2012. We've built specifically and purpose built systems, what I call UC personal end-room systems for the CX areas which are Polycom devices purposely build to interoperate with Lync. We’ve done an excellent job in terms of cohabitating and going to market with the Microsoft iTouch in channel theme.
And in fact if you look at just year-to-date what I call influenced revenue growth, real revenue growth it’s a 165% up year-over-year as it relates to Microsoft. We have an incredible executive relationship with Microsoft. We are very clear in terms of how we will work and in terms of operate with Skype. We are very clear and very confident that Microsoft will continue to leverage Polycom in terms of the enterprise class software on Microsoft Lync. So I believe that we are in better position ever to leverage this unique opportunity around Lync.
Secondly, around IBM, we have a phenomenal opportunity to team with IBM in terms of not only the Sametime connections and integration, but as importantly for the very first time to have the GTS sales team at IBM to deliver Polycom solutions as the core offering. And in tandem with that, high the IBM relationship to the AT&T team relationship where we have just been certified to operate our RealPresence platform on the AT&T network.
So again, with IBM we are in very early phases, but I believe from an executive relationship perspective, an opportunity to not only leverage Sametime but frankly as importantly is to leverage the GTS organization to provide Polycom RealPresence platforms and services.
Next is Hewlett-Packard. We have, as all of you know on June 1st introduced and announced a relationship with Hewlett-Packard which was an exclusivity arrangement around sell-to and sell-through and acquiring the HPVC assets. We are just in the beginning phases of leveraging that channel community to HP, aligning to our high touch and global team to be able to not only focus, but also to be able to now start seeing the leverage in terms of the HP channel. We also, as we talked on Q3 earnings ahead of our plan in terms of the integration of the HPVC or Video Collaboration group with inside Polycom. And we are in a very early stage of a rollout with our systems integrator field rollout with Hewlett-Packard.
So again, these do not happen overnight, these are quarters and years of making required significant investments and executive relationship. I feel stronger than ever with our relationship with Microsoft, around Lync and Office 365 and 365 in the cloud will be a key differentiator against our largest competitor. Our opportunity to leverage IBM and Hewlett-Packard is just in the very beginning stages and that’s why we’ve made these investments and we’ve aligned with their executive team.
And finally with Apple. We have an excellent opportunity as I talked before we’re seeing that 90% of the Pad deployments are with Apple iPad 2’s. The host of opportunity which I’ll share with you in a moment around mobility is very interesting and a clear differentiator in terms of margin and revenue growth and leverage around how we differentiate our relationship with Apple and frankly to bring your own device though process around the mobile application. And frankly, the opportunity to exploit a complementary market segment and Apple’s very interested in healthcare and education as Polycom is.
So again, just for clarity, these alliances are critical. They are critical because we want to establish a balance. We are also very clear with IBM and HP specifically, very early stages but great opportunity for growth.
In philosophy, as related to service provider which in fact may even take longer to bring to fruition; we give several examples here, our work with BT, with Verizon with AT&T as an example. Our opportunity with BT to work with them in partner around the deployment of managed and hosted video specifically around Lync is a key differentiator in terms how we can partner with the service provider to expand and deploy Lync services to a carrier.
Our relationships with Verizon in terms of how we are going to partner with BroadSoft and Google along with Polycom for the SMB market is very interesting and unique as related to hosted and cloud type services and our relationship in terms of driving the RealPresence platform with inside Verizon.
With AT&T, how we launched video added service with IBM, as I talked before is critically important in terms of how IBM, AT&T and Polycom can go to market. Our ability to provide RealPresence mobility and again the certification of our technology on the AT&T network.
These service provider opportunities have been and making now for over a year and half. They require significant investments around certification, around personnel, around labs. The true point comes when certification occurs and the go-to-market partnership begins to expand operating leverage. We believe the relationship with BT, with Verizon, with Orange, AT&T, Telstra, Softbank, Telefónica and China Unicom are now in play to provide a great opportunity for our company.
The fact that I travel around the world and I have personally touched each executive of the service providers. We are starting now to see key wins from these carriers and key partnerships that we never saw before like, Verizon, Google, BroadSoft, Polycom, like the certifications now available with AT&T. Like the deployment that will now be offered by BT and Lync. So we feel very confident that our service provider relationships are moving from sell-through as a channel to now eliminating and be able to provide cloud based opportunities for our company.
We also introduced back on June 1st what we called ODCC, the Open Digital Collaboration Consortium. And this consortium is all about a variety of service providers that are focused on an opportunity to work over any network, to interoperate with any vendor and to be agnostic in interoperate within a device. Should we see the family members of ODCC, these are members such as Airtel in India, Verizon, AT&T, BT, BCS just to name a few.
Working with any vendor and of course these are some of the largest enterprise vendors in the world. IBM, Siemens, Microsoft, and even Cisco, work on any device it could be a mobile device, it could be social media, it could be Immersive Telepresence or some type of room system conferencing.
The value proposition, why this is so important to the cloud is because we will now offer a transparent commitment to our customers to be able to walk through and offer services to any service provider, no matter what device, no matter what network and to interoperate with any vendor.
So as these service providers start positioning the RealPresence platform, in their core they can now be able to with full confidence hand off a video call to another service provider, have the ViVu software in place and have for the first time in our industry the transparency to offer this type of service in a cloud environment. We think that OVCC would be one of the most important breakthroughs in terms of moving to cloud and offering full transparency to full interoperability.
I also talked on Q3 earnings around why mobile and social are so important. Why is Polycom making investments in these areas and I want to talk for a minute in terms of how we intend to monetize both mobile and social. Firstly it’s the Edge software, the ability to be able to download through an application store or natively embed our application on these devices is viral in terms of how this mobile app will be delivered.
We intend to deliver our applications on leading social media platforms and mobile platforms, like Jive, like Apple, like Samsung and like Motorola just to name a few. And we believe we have a unique opportunity to brand and have a premium upsell in these applications.
So software is number one in terms of how we intend to monetize. Secondly and most importantly, it’s the infrastructure required. Whether its B2C or B2B, the demand for RealPresence platform is going to require a set of technologies to drive this mobile and the social media platforms. Because if you look at the mobility for an example and you have an enterprise company that wants to embrace Polycom RealPresence mobile, they will be required to have a Polycom RealPresence platform, software license with inside of RealPresence platform, drive software seats for applications and drive scalable revenue leverage and uplift in terms of Polycom infrastructure what we call RealPresence platform.
And certainly if the UC pulls through, it creates a great network effect through our UC personal devices, network infrastructure and now cloud based performance. Because it provide a six-year integration with our existing platform and future platforms to be offered in a cloud mentality. So if you look at the chart that we put together, you look at the tablets, iPad, Zoom, Galaxy, you look at saleforce.com Chatter or you look at Jive, you look at the middle core which is the RealPresence platform driving that growth, this is how we monetize our investment and ability in social media.
Its about branding, it’s about continuing the experience of Polycom, but most importantly it’s about the monetization of Edge software, UC infrastructure and UC pull through, And in fact as Mike and I on the four quarters, we will give you examples of how we intend to monetize in two customer wins around how we differentiate our competitor.
So hope that the monetization of and our investments in mobility and social media give you an idea of why these two new areas of this business are so important in terms of how we differentiate ourselves, by an agnostic approach and open standard approach and an interoperability of approach.
And now I like turn it over to Mike for our operating performance.
Alright thank you, Andy. I appreciate it. So I am just going to go through a few slides here highlighting some of our growth parameters and our margin expansion parameters that we expect to see here over the next several years. If you look at our company we have a great and long history of strong revenue growth year-to-year. Matter of fact, in our history there’s only been two years where there was a step down in revenues, one was in 2003 where we did an extensive overhaul of our channel model to more of a high-touch pull through model rather than a channel-push model, so that was a permanent change that we made in that period and then more recently was of course the downturn in 2009.
But if you look at it, as you know we had a very strong growth about 26% in 2010, we expect to have a strong 20 something growth here this year and in fact if you look at our year-to-date actuals on 2011 and the guidance that we provided last month for Q4, we expect to close out this year at approximately $1.5 billion in revenues, an important milestone area for the company of course.
If you look at our sequential quarters, it is also important to note that actually coming off of the kind of Q4 ‘08 financial crisis we actually from Q1 ‘09 every quarter thereafter we have had sequential growth in the company’s revenues. Even in Q1, we have had sequential growth in both Q1 10 and Q1 11 which modest growth it’s typically unusual for us and then Q1 had been historically a slightly down revenue quarter.
So we’ve really done a great job and not just driving strong year-over-year growth but at driving sequential growth on revenues as well. If you look how at the company breaks out by geography, you’re aware of some of these. I wanted to just make a couple of highlight. So first of all, the Americas meaning from Alaska to the Magellan strait is approximately 52% of revenue, it’s about slightly more than half the company. That’s of course we did heavily by North America and Andy, I think, did a great job earlier of highlighting the significant and tangible improvement that are already underway in our execution for North America.
From leadership change as well as several parameters that Andy highlighted. So that was the Americas of course just last quarter were 16% year-over-year growth. We actually are optimistic about the growth opportunity in North America driven by the various things that we are doing there and of course right in US Fed et cetera. So we will expect to see some improvements in North America here going forward and if you look at EMEA, actually I know there’s been some levitations by companies around the EMEA situation, but quite candidly we’ve actually done quite well in the EMEA this year. We’ve actually had a in the last quarter 23% year-over-year growth. So solid growth in the EMEA theatre and it’s almost a quarter of our revenues. It is actually just about tied with APAC, East Pacific slightly less on a pure math basis in revenue. But I know that
Hansjoerg Wagner is gunning for Gary Rider if not in Q4, certainly in the near term with the growth rates that the APAC theatre is having.
So there are in the brink of crossover. In fact, if you look at that, it is nothing short of spectacular the growth that the Asia Pacific theatre continues to garner 41% year-over-year growth in the most quarter driven by China, India, I think in Australia and fairly in decent even in Japan where things of course have been a lot rougher for the unfortunate circumstances. But some great growth in the APAC theatre and a highlight I would make about APAC is it’s the fasted growth driven by those very large and important high growth markets. It’s the highest contribution margin in the company, that’s right out of our 10-Qs, that’s publically available data.
Well fantastic results in the APAC theatre and contribution margin and actually some of the highest shares in the world is where from the market standpoint, 2010 exit a 42% share in the video business, vis-à-vis of Cisco, ViVu and others. So, dramatically ahead of other competitors in that region, a very important region for Polycom.
If you switch gears here, then it’s okay, so that’s one slide. So, now that’s the X dimension, I will look at the Y dimension around product. Okay, so this constitutes the total solution revenue for the company, but if you look at the way it breaks out, about two-thirds of our revenues today are from group systems, Immersive Telepresence Systems, like the one that Andy and I are in and some of you’re in or you are certainly in Santa Clara.
Also, group video systems like you are in and some of the other meeting rooms here in New York City, and just a whole wide array of anything where it’s intended for a group setting. So that’s about two-thirds of our revenue. These are heavy software content solutions, great gross margin quite candidly and that’s a proponent of our revenues today. We also have UC personal. Those are literally, they could be some of those CX or UC devices that Andy talked about, either voice-only or voice and video, they could be executive desktop video. You will find military brass or the executives in companies, of course you want to have this really phenomenal purpose-filled, HD video solution for their desktop. We clearly have those kinds of solutions and that makes up 15% of the company’s revenues today.
Last but definitely the most important is the category of UC network infrastructure. Our branding for that is the RealPresence platform and that is everything from virtualization, media management to as the whole wide array of what Andy covered a couple of times during his talk around the RealPresence platform itself.
And frankly, as you know, many of you who have followed our company for a period of time that is an incredibly important area because it ends up kind of being a bit of leading indicator in many cases for our company, it is kind of winning at the core. So, that’s quite critical because if we win at the core, you don't necessarily guarantee winning at the edge, but you dramatically improve your opportunity to win at the edge as well. So it’s a huge and important area for us and if you look at it that through 34% year-over-year, that's like the impact of product.
So its been a significant grower for the company and then the other thing for the financially oriented is fantastic because of its gross margin profile. As I have been public about on many occasions it actually garners a 800 to 900 basis points of higher growth margin than the other products in the portfolio. So as it grows and as a matter of fact I will cover this in just a minute here around the gross margin expansion, but it is a key driver as it continues to grow in driving up the gross margin in the business.
Lastly, before I go on to that area, and if you look at kind of the V dimension I guess you could say its around the channel. Now keep in mind that we are a, as Andy touched on, we are a high class execution model on our go-to-market. So we have a significant sales force of sales engineer, solutions architects and quota bearing account managers either horizontal by theater or account named or verticals, etcetera but these people are out there actually driving the sales of our products.
And however, that being said, if you can feel only 2% we literally fulfill directly, that tends to be some renewals that weren't touched by channel or the occasional customer, the demands and absolutely direct relationship which is rare that we don't get it back to a channel. That our premise is to as we have been and continue to always then fulfill through one of these relationships probably more and more kind of a cloud based relationships as well, or systems integrator like with an IBM GTS or an HP, etcetera but nonetheless we do fulfill through channel.
Just the last point here on this one before we come off the chart, you’ll see that service providers, very early I mean its much successes we are actually having with some of these folks. Its all then including some of the second or third year going to just be 12% of revenue, so overtime we expect that to growth as a percent of revenues, undoubtedly, but today its about 12% of revenues.
If you look at our long-term operating model, many of you maybe aware that our gross margin model is 59% to 63% although as you know its been loosing over the midpoint of that range and probably over the long-term there is some upside there and we have guided that it will increase by 10 basis points this quarter and well undoubtedly continue to increase overtime and I’ll touch on that I believe on the next slide.
Sales and marketing, our target is 24% to 26% over the long-term. We’re 20.77% today with some of the investments they Andy touched upon. R&D in the 10% to 12% model, 12.9% coming out of this most recent quarter. And G&A already in its target range, we came out at Q3 at 4.4% our best-in-class target there is 4% to5%. And with the work that we’re doing around some of the leverages that I’ll touch on next, we are targeting a 20% to 22% operating margin over the long-term and we’re at 16.2% in the most recent quarter.
So it is part if you’re okay Mike, you guys were talking 20% to 22%, talked about that for quite some time so kind of walk us through how you get there from the 16.2% that you are at today and towards the 18% to 20% that you guided ‘12 in 20% to 22% beyond that. So some of you guys will obviously do this, I guess it takes across here, so lets off with gross margin, because there is a relevance to gross margin in that story.
So A number one, they are all here, but let me just on touch on. A number one is a mix shift; frankly we are seeing and expecting to continue to see some mix shift for that RealPresence platform. Remember that platform that has that 800 to 900 higher basis points gross margin than the consolidated company. We also expect to get some pull-through at the software level. Some premium up-selling another drivers that Andy just touched on. So software margins, core network infrastructure margins they are higher is a mix shift that’s how the math is going to work there.
We are also seeing and expect to continue to see some pricing strength through our leading innovation where we’re getting some selections like Andy touched on with one of his examples that was simply with in ICBC a huge win there. It went around a lot of things, but one of the key and things known back to us against the obvious competitors there, was that they went through this extensive lab testing and we’re just VAR known the best innovations in the entire industry and that’s helping differentiation obviously.
Also frankly, POCN integration, Polycom Open Collaboration network integration. These are products that have completed horizontal way that they all work the same with an IBM or with a Microsoft Lync I mean quite to the contrary, we have deep in the lab certified integration with these partners and that’s creating some real value which actually is very good for pricing as well obviously.
Another one, as you’ve seen that we’ve been able to grow our services percentage of revenue overtime and frankly the gross margins inside of services as well, Ron and his team had a done fabulous job there in getting the gross margins up quite steadily overtime and we look for continued great things there both on the percent of revenue side as well as the margin percentage side of revenues given the buyback on that. And in fact, if you look at historically, it’s done extraordinarily well, we’ve got the margins right up to the consolidated averages for the company, dramatic improvement over the past several quarters.
We also have some increases in transaction size with our high touch approach. The way it’s working so effectively, we’re getting close – if you think about it closer, customer able to sell a broader solution and with that there are some fixed overheads and things like that we can benefit from even on the COG side and that’s been very useful for us. And then frankly there are some good blocking and tackling that sounds like for example supply source.
The supply chain optimization is quite relevant for us as well that’s for it something that some of the folks and Ron and his team again are working on. And there are some logistics things that as we move from where we are which has been great to leaning forward into the future and it’s a best-in-class things around fighting optimization. We can take some real cost down and we plan on doing that in 2012 and 2013.
If you look at revenue leverage then this is going to drive some of that operating cost piece. So just kind of dive going to the operating gross margins piece; I am going to talk about the operating leverage associated with the revenue growth that we do expect in the company here going forward.
So Andy talked about North America, I won’t belabor that but by definition we would expect one of the benefits fall out of that in addition to some revenue growth is aligning the contribution margins better with EMEA, its hard to say exactly how far it will go, but aligning it better with EMEA.
Another one is just the gross markets; we got a lot of revenue leverage being driven by break-in growth in the emerging markets. So we expect to see some ongoing strength if I can candidly. We have a collaboration network and we don’t breakout the numbers by partner, they didn’t allow it and even the ones where we take planning and commitment, we already have them pretty decent revenues frankly coming out of them.
But if you look at it, its over a 100% growth year-over-year YTD, so straight. I mean its already performing, I mean a lot of that sounded like the future, we’re just thrilled because frankly the proponents of the opportunity is in the future, but already it’s a material contributor to our company’s growth.
The emerging market OpEx optimization, now this is not as sales driven like break-in emerging markets like I just said, this is down on the cost side, we got a really good job around some of the back office operations in my functions for instance from the high transaction non-customer faith and function as well in R&D. We have done a good job in getting into some of these emerging markets, like Hyderabad, India, Beijing China and places like that. But they are actually the two primary ones, in reverse order I suppose, but 34% of R&D of our headcount is already in those low cost geographies, a 24% of the G&A headcount is already there.
And then there is just a leverage versus fixed cost pressure. The shifts appear, if you take all those off the table which is a lot, but just about the sheer growth side of things, approximately and you know that is not even close around fixed costs here, because nothing is fixed, very little is, maybe some depreciation, but if you look at headcount and deprecation and some of these other drivers, it’s about 60% of OpEx, so you can just see what’s the math on various kind of sensitivity analysis, you would see that there is some real revenue leverage opportunity in the OpEx line as well.
And then lastly, what does that yield to in the most recent call, Andy and I gave the guidance that in 2012 we expect each quarter to be at 18%to 20% operating margin. So that just hopefully gave you clarity around some of the drivers on the G&A line, some of the drivers on the kind of OpEx line as far as even our estimates of revenue that will yield some more operating margin expansion here in the future.
Very brief on the balance sheet; I’ll turn it back over to Andy; just as publicly available data, but just to highlight the fact it’s a very crisp sterling balance sheet 540 million in cash investments exiting last quarter net of the moving parts in Q3 and the repurchases, no doubt with the business at all. A best in class DSO of 49 days including that mix shift international as well might add. The inventory returns in our target range at 5.3 and we exited Q3 just under 3900 people, and then of course one of my favorite highlights at the bottom I would have the ticker as of Q3 55 consecutive quarters of positive cash flow. So this is the cash generation business clearly very predictably over more than a decade.
So on that note before we go to Q&A, Andy will summarize.
Great. Thanks Mike. Let me just conclude and we are going back to Q&A in terms of our investments. It’s important for me personally to make sure that in today's conversation we had a chance to articulate what I will call our North America evolution in terms of management trajectory, our opportunity to share with you how intent to leverage our gross margin and operating profit. How we intend to monetize mobility and social media because I think it is a very important element, and finally where are we with Microsoft, IBM and HP and our carrier specifically as it relates to monetization of those relationships, and also and finally how we intend to move from a CPE to a cloud based business. Those, for me, I think were the most five important.
Clearly we are in a fast growing market, and our focus is leadership and market share gain in this market that we position ourselves in. So we feel that our broadest set of solutions is here today in terms of RealPresence’s platform and as Ron articulated, our movement into the cloud, social, mobile software is a reality and that's where we put our investments in to be able to garner that as those markets begin to evolve.
Our brand and channel strength is very important; we are working through as we move to become more of a software company, our brand initiatives in terms of Polycom cloud, in terms of the RealPresence’s platform, in terms of co-branding in making sure that we have our brand element on everything that we participate in.
On clearly are approach versus our largest competitor is very different in terms of open standards interoperability, our agnostic approach in terms of cloud software, in devices that we believe that is beginning to resonate as we get stronger as a team.
If we can manage these partnerships correctly, which we will, Microsoft, HP, IBM, AT&T, Verizon etcetera these are very important differentiators in a very important, frankly what I think are a line in the sand versus our largest competitor. We are showing strong top-line growth and we believe, as Mike said, that we can do a better job in terms of leveraging operating margin and gross margin in our company. And I think we have the right management team, you know, it’s been a labor welfare for many of our several --- over the last 18 months in terms of management team expansion, upgrade and we’ve been able to now, I think, sure up our North American approach and also from an R&D perspective that’s in cloud pallet in terms of our cloud in software.
So very confident future, and I appreciate the time that you have taken over the last hour 20 minute to hear the Polycom story. I would now like to open it up to Q&A, and I would like to start off with Sandy Connors, they got up the earliest this morning.
So let’s open for lines to Sandy [Connors] and we’ll work through New York. So Sandy Connors?
Jim Suva - Citigroup
Great. Thanks. It’s Jim Suva, can you guys hear me, okay?
Jim Suva - Citigroup
Great. Thank you very much. Maybe, can you guys follow up on your earnings guidance you guys made a mention about, at the end of the quarter you have some business transactions that didn’t quite close or elongate a little bit, how it’s been a few weeks past that, can you give us an update on that?
Sure, we’re several weeks into the quarter now, and the transactions, the sales from Q3 and Q4, having bit been closed, are in the process of being closed and we feel fully confident that these will be closed in the quarter of Q4.
Jim Suva - Citigroup
And then a quick follow-up. Was the main reason for those elongated closing of the transaction was it price, was it economic uncertainty by the large corporations, were it just not having the right personnel at times in the right accounts or what was the reason for the lengthening of the closure cycle?
Well, we said that there are really three. One was executioner on our part, second was from macroeconomic, and third was the transactions. As we look they really are larger and more complex. With that said, our focus is not to make an excuse, we have corrected from an execution perspective, North American alliance in terms of management and in terms of execution philosophy. We deal with the economic situation that’s in place, but we’ve done exactly with what we said. We’ve closed the transactions in Q3, to date in Q4, and the ones that are closed will be closed by quarter end.
Some more from Sandy Connor?
Two questions, Mike. I just wanted to clarify, you said that operating margins you are looking at 18% to 20% for each quarter in 2012?
And that includes Q1 given that you’re barely going to touch 18% in Q4 and Q1 usually seasonally [weaker] I just want to make sure I got that the parameters correct?
Yeah, we guided 75 in Q4, and yeah 18% to 20% each quarter of next year.
Okay. And then just on the network infrastructure piece, I know that’s going to be where you get leverage on gross margins that is one of the place where you get leverage in gross margins, and it has sort of stagnated about 15%, maybe 16% of revenues over the last 7 quarters, can you talk about sort of how soon do you expect that historic contributing positively growth margin because of you know increasing as a percentage of revenues?
I mean, it’s hard to call a quarter by quarter, but now with the expectation from a increased percentage of our Realpresence platform with all the drivers that Andy went through early.
Let’s go to [Tribecca].
Yeah it was Jeff Kvall, Barclays. Thanks very much.
Jeff Kvall - Barclays
I heard a question reach you, should I think, number one the things that you chose to increase your OpEx late in the third quarter, could you talk us through a little bit of your thought process there and where that’s going to have that impact? Is that 18% to 20% in the first quarter, that feels like a pretty high bar? And then maybe on your side it also seems as though some of your growth assumptions do not account for the possibility of cannibalization of the group system by data or network solutions tablets, so can you talk us through your thought process on that as well?
Yeah on the first one, yeah, I mean from a we are not going to give you specific quarter by quarter guidance, the question is fair which is in Q1, we really got a (inaudible) to the drivers there that I talked about in the end markets expansion profile. We do expect that we will continue to see benefits as I noted on that page, and clearly it will depend on the exact guidance we gave for revenue for Q1 which obviously won’t go until January, but yes based on all of those drivers, we do expect to be clearly be alone in the range of – in the Q1 timeframe, but we do expect 18 to 20 quarters a year.
And I would just add that because the other question, the first part of it was around the investment that we chose to make in that timeframe. Try to really articulate today. Those investments were around mobility, around social media and around two specific partnerships with IBM and Hewlett-Packard. Those are more around, if you go to market alliance and channel and the investments around mobility and social media, majority are from the R&D perspectives. We saw the difference -- the ability to differentiate, the ability to strike first the market, and the ability to be able to clearly align those specific kernels of mobility and social media to our RealPresence platform, we thought was a unique time.
And as Mike said, we intend to participate in that 18% to 20% model and we are committed to Q1.
The second part of it was the cannibalization, and clearly we have actually taken that into account. If you think about the tablet proliferation, if you think about more desktop, the way we look at it is, yes that will occur but at the same time, the software requirement will even become more important because we frankly operate those tablets, operate social media, requires not only the RealPresence platform, but as I said before, the license fees associated with that and the service flow-through.
So, we believe that tablets are a positive for our company that the cannibalization, while it could cannibalize UC endpoints, it reemphasizes a software and most importantly, it reemphasizes the stickiness of software with inside our carriers. So we actually have built that into our P&L. We have built that into our strategy as it relates to that, and in fact you may not have picked up with Rama when he talked about product, had a picture of a docking station with a pad device unit, with also a handset provider, high definition audio. So we actually are embracing pad deployment because it will pull through gross margins and software and also additional device infrastructure.
Jess Lubert - Wells Fargo
Two questions, first following up on that last one, you laid out some healthy growth assumptions looking before the market’s grow 17% to 34% over the next several years. Is this a fair range to judge you by in 2012, and then the second question, with respect to the North America sales force restructuring, the 10-Q discussed a 5% headcount reduction as it’s all taking place as this procedure thus far and can help us understand why we shouldn't view this as a disruptive event.
For a quantitative growth, I will take North America. Okay (inaudible) you put up a slide I think showing that the market…
Yeah, yeah the market, I am sorry -- over the next three to four…
So I think, if you look at the growth slide we put up, we had the current TAM, it was at 17%. Clearly, we love the initiatives that we are undertaking. It will bring us into those other markets as well. I would say that for ’12, specific question for ’12, I would always try to take a conservative posture and say let's focus on the TAM and then lets -- asset expand this week you have delivery points along our path there on the road map. Then we can start to bring in those others. So, yeah, I mean we’re not giving 2012 revenue guidance here, but clearly we would expect to be in a, I mean, a sure gain overtime if anything. So be the current TAM and you think the TAM will grow 17% 2012. That’s where the third party data is and we would have no reason to for the strong waiting on that one way or the other.
Let take some important – the other areas, cloud, coverage, and software mobility, we projected out the TAMs in compounded annual growth to 2014 and try start to take a look in the very early stages of this elements.
The second question was around North American sales. I want reiterate that this has been an evolution that’s not knee jerk, and that we added [theater] president who ran Cisco’s largest client, AT&T. He was the number one Vice President Sales for three years running. So David, is often in races. Even as also in the process of hiring four Vice Presidents for North America, three on board, the fourth will be on board by the end of the quarter. We’ve also taken about a dozen of our channel team in transfer that in to headcount for high touch, specifically in key heads of all city, and then they’ve done, frankly, a better job in utilizing our telesales for our channels I mentioned before, that was about $5 million. So I feel confident that we will not miss of the North America [students] change for two reasons. One, I mentally involved Tracey Newell, who was our Executive Vice President who ran Cisco and Jennifer (inaudible), is internally involved in North America with the on-boarding of the team and as I stated earlier, retail confident that through Q4 or closed the deal for flip and keep our commitments that we made in terms of guidance for the quarter.
Jess Lubert - Wells Fargo
And has the vast majority of the headcount reductions already taken place?
Jess Lubert - Wells Fargo
Let’s go Liberty. Tavis [ph]?
Yeah, thanks. Two question. Andy, your cloud strategy changed a bit today. Later my understanding was, previously I think you’re counting on the OVCC and selling equipment into those carriers. That was then provided the cloud services. Today, I think you articulated that you’re going to be building your own network and then selling access to that network for the service providers. I want to make sure if I heard that right? And then a follow-up is the [Sedaka]. A lot of smaller companies now starting up using x86 processors for video processing? What are your thoughts process and cost competitiveness on that?
Let me take the first one. Our strategy hasn’t changed. It’s evolved with the (inaudible) acquisition. So our cloud strategy has always been to provide our RealPresence platform to the carriers to allow them to eliminate either public, private or hybrid clouds. Then utilize our end point technology, group or personal devices to proliferate the ability to utilize those clouds. So that strategy is well in place.
As we acquired the HP’s Visual Communications Group, with that came a great opportunity to take that HVEN network, that [OC3] network in place and actually for carriers, kind of take that network and turn it into a cloud that we can white label to our tier-1, tier-2 or tier-3 providers. And the process behind that is many of these carriers take quite a bit of time in terms of certification, the technology deployment, and training on bringing up the cloud. We felt with the HVEN technology that we have on slate today, that we can very quickly bring the cloud to market and not to be sold through Polycom, to be able to be white labeled and branded by Polycom and the carrier to be able to offer the customer. So think of it as a jump starting of cloud technology.
And the next generation of that is to be able to then get them propped up enough to be able to offer, against their own cloud powered by Polycom. So again, strategy is exactly in place but we’re given a gift with the HP acquisition of HVEN that will now allow us to jump start and bring the market first, the first carrier-based cloud enabled and utilizing the RealPresence platform.
Tavis, what you may not be broadly advertised or known is that a significant portion of the RealPresence platform that Andy described and I spoke through from a roadmap standpoint, were already based on [Apax] technology. For instance, our call control systems, the management’s application, the media management subsystems, they’re already based on [Apax]. Out of the evolution that we’ve been undergoing to make it more software rich, more focused on virtualization, multi-tendency and API support. At the same time operating systems are purpose filled because of the unique means to support transcoding in our systems. So this goes back to the backwards and forward compatibility aspects of the RealPresence solutions and so we take the approach of leveraging purposes, hardware and software only when its absolutely needed but for the most part, a lot our component in the RealPresence platform have already migrated to [Apax] and we continue that migration going forward. So that’s where the reason is for the gross margins. That’s where the reason for of our software comes into play.
Let’s go to our Wall Street.
Hey, Mike, Andy and (inaudible). Yeah, I had a couple of questions. First, RealPresence, just wanted to make sure, I understand the news. You had a branding I will call, (inaudible) 4 I believe, and this seems to be just the evolution of UC Intelligent Core. Is there any other product besides the traditional MCUC because those are hardware based products. So, I guess, I was wondering if they are like a server product that’s more pure software, than you’re putting in to mix here with the RealPresence. That’s first question. Second question is you talked several times today about how its very early for a mobile cloud and social media and these requires significant investments. I guess, when should we be thinking about the pay off from these areas and then on the issue of cannibalization, you know, what happens to the traditional hardware end point business? In the mean time you talked about some cannibalization but there is still two-thirds of your business, and so it’s a difficult transition as you guys know in technology, where you trying a transition, two-thirds of your business. I know, you’re not going to go way, overnight or any point of that but if there is cannibalization, how do you manage that transition?
Okay. Lets take a piece of one of them. First one is Real Presence. So we basically took the UC Intelligent Core which was frankly the RMX platform. And we've taken the other elements, the software elements around DMA, which was the virtualization software, CMA which was the management software and all the interoperability software and bundled it into a platform.
Software platform that it is called RealPresence and that has the opportunity to do all the things I’ve talked about in the externals. I am in present focused around call control, video control, mobility, social media and all the interoperability standards. So we've taken the UC Intelligent Core, combined that with the virtualization software, management software, IM Presence, web conferencing, call control, mobility and social media and branded it into a platform that has all the externals and that can evolve into the Cloud. Most important part of the RealPresence platform it could be CPE based, it could be hybrid or managed or it can be Cloud enabled.
You will see that continuing into, to be branded across the board in Polycom. So the second question was around when are we going to, we made investments to mobility, social media and in Cloud, when are we actually going to see those come to fruition and be maybe revenue or operating margin leverage, you know I think we are not going to give quarter by quarter’s guidance in terms of when we see that revenue or to the degree. We will do that as we see those revenues become more material but even in some of the examples I gave today like ICBC, that is the largest private cloud that's been launched globally.
So there are opportunities to start seeing cloud revenue and we have seen that today. Clearly mobility and social media will take time just because of the work that has to be done with carriers and the work that has to be done and take saleforce.com, LinkedIn et cetera to be able to eliminate those there. So Mike do you have any comments on that timeline?
No, I think that we’ve clearly been a bit conservative in our expectations as we think about our 2012 eternal planning process. Yeah there will be pullthrough of the RealPresence platform and data laid by many accounts that are doing wide deployments of iPad and things of that nature.
Just one quick example, when I gave the keynote at CTIA, one of the largest biotech companies in the world, stated they expected to deploy, they have 2000 iPad tools deployed now, we will deploy 6000 by the end of calendar year 11 with the Polycom RealPresence mobile application. Each one of those will require a software license in RealPresence platform technology.
So that’s just one example of a customer today in Fortune 100 that is actually utilizing our technology and I think that will continue to proliferate. The follow-up question was around cannibalization and I tried to articulate it early.
We are actually seeing significant uplift on Voice over IP, so I think the myth of the death of Voice over IP is actually the inverse. As more hosted solutions whether it’s Microsoft Lync or some of the Verizon hosted solutions are gaining strength we’re actually seeing an uptick in terms of our UC personal devices, specifically voice only around voice as an example. We continue to see our UC process devices from a video perspective grow as we see opportunities to expand the market with the RealPresence platform.
So as I said before, we have taken the cannibalization into account and Laura’s correcting me, well, she’s adding to me. She’s saying trying to protect, so it’s a protect and grow philosophy, thank you Laura. But most importantly as Rama talked about in his product strategy or roadmap, we continue to bring out new devices, devices like Microsoft Lync where we have licensed the software, devices that will be delivered in the cloud. So while we always keep our eye on that and that don’t diminish our model we feel very confident. Let’s go back to, do a full circle, let go back to our Santa Clara again.
Jim Suva - Citigroup
It’s Jim Suva. A quick follow-up. You guys talked about your very clear roadmap with Microsoft. Can you just help us, a lot of time you get a lot of pushback from investors about well why did Microsoft then feel a need to fill a void of their gap by buying Skype. Why wasn’t that need completely filled by Polycom? For some reason they felt an obligation or a need for something you weren’t offering or their roadmap just didn’t appear? Can you help and remind the investors again about that clarity of the roadmap and why you think they bought Skype because of things like this you guys have an opportunity there that for whatever didn’t materialize?
Oh I think that and I'm very close to the Microsoft executive team. So let me try to reiterate it one more time. You know, I'm not going to talk on behalf of their decision to buy Skype, but I will talk about the differentiators between Skype to what Polycom is offering. Skype is a consumer grade voice and video platform. We believe that Microsoft will use that on the consumer and on the mobile side around monetizing consumer gaming and mobility.
If you look at Skype, it is not secure, does not use standards, it is very restrictive in terms of interoperability and those elements are not privy in an enterprise application. The reason that Microsoft chose Polycom for an enterprise application like Lync or Microsoft Office 365 in the cloud is for a reason. One is we built this scalable video codec at an enterprise grade quality, both in terms of video and audio to be integrated into Lync, provide high definition desktop. Open standard, highly secure, interoperable, investment class video and voice.
An enterprise customers will not tolerate current site technology. Number two is we built purpose-built systems to interoperate and integrate with Lync like our CX series of voice devices and our CX series of purpose-built video devices for small to mid-size group conferences.
Thirdly is the enterprise sales team and channel team from Polycom. It is absolutely clear that when Microsoft engages with Polycom, they have a higher win rate on their Microsoft Lync versus Cisco CallManager and it is very clear on our side selfishly we use Lync as a differentiator, we have a higher win rate. So I feel very strong as there is a line in the sand drawn between Skype and what Polycom offers. Polycom does not have the number of millions of users and Skype users for voice calls. That’s not what we do. We offer best-in-class video enterprise grade technology. So we feel very confident that the roadmap of Lync and Office 365 is tied to Polycom, it’s being reiterated multiple times in the public domain, with between Polycom and Microsoft and clients very confident that those two will not intersect.
But I would like to see and I think we can expect to see some interoperability between Skype and Polycom over time because I believe the ability to go from the B2C of business to consumer is something that’s healthy and it will expand the market as well, as long as it doesn’t degrade the enterprise experience. Turn it back?
This is (inaudible). Can I ask you a question about fourth quarter seasonality and the type of things that we like to do, of course, over here in the time? So that where that 10 million would have been and where it should have been and what have you done and if you do that and in the account rate fees, and it does suggest, but there is not a lot of seasonality, seasonal up tick built into the fourth quarter guidance. I know this might be a bit of a different year than it has been in the past. So, could you talk a little bit about your thought process behind that and if we’re seeing our own. And then the follow-up would be, Mike, were you giving us a clue on the first quarter seasonality by talking about growth in the last few years?
Phil, we’re not guiding Q1. Yes, we’ll be guiding that in January, but I understand the question. So around Q4, you’re right. I mean the math does speak for itself. I would say this. Clearly the rollover transactions provide some cushion, candidly for Q4 but that is part of the way to think about that. As you know, of course, we had a couple of percent top-line lift in Q3 and so yes, if we want to take a posture that ensure that we would be in good stead for Q4 and beyond, absolutely.
So I probably don't have anymore of a sophisticated answer than that few jumps, but that is what is going on there. As far as seasonality itself there is always by deflect seasonality for the 1231 countries and verticals which is still the preponderance of the world’s fiscal cycle and so yeah you would always expect to see some of that, but we want to take into consideration the mix and the variety of risk factors that we outlined in detail in our 10-Q.
May be there is another question, try back if we could. Okay?
Rohit Chopra - Wedbush
Hi its Rohit Chopra from Wedbush. I wanted to ask Mike a question just on the drivers of gross margin; you listed five of them. I wanted to try to understand which one of those five would be or could offer the greatest opportunities for uplift in gross margin for 2012 and the other piece to that is I think the second one you listed pricing trend through innovation. So I was wondering maybe Andy could talk a little bit about the competitive market, how do you get I think strength when everybody is hearing a little bit about increased price pressure throughout the market?
I’ll try to fill, Rohit that its hard which one would contribute the most you know its hard to pick favorites here, but I think is ordered them in a way that I think its somewhat relevant, but frankly I think mix shift is a big one. I do think that pricing Andy will cover, the top four me and that's a high margin business and supply chain optimization frankly, that won't be an instant gratification, but I think over the next few quarters there will some opportunity there. Those will be my comments on those. Maybe mix shift in the near term.
As it relates to competition, majority of our competition today is against Cisco. If you see LifeSize in the small to medium markets we do see some of the emerging startup software players and clearly in EMEA – I am sorry, excuse me in APAC. We did see a [WOW] as well. We haven’t seen any dramatic discounting in Q3 or in fact in Q4 to-date. What we have done instead is we’ve expanded our product portfolio through services and through the continuum of what I talked before which is IM and Presence the virtualization software, the cloud software to provide a ability to not have to discount but to offer an expanded product line with the right underlying service opportunities.
So we believe that we can continue to extend our product lines through differentiation and frankly additive software kernels and not have to participate in any future “Discounting Wars”. We don’t see that today, we see a pretty consistent methodology by competitors as relates to discount. We believe that we have a much better toolset now of software kernels to be able to compete and differentiate us and some leverage our as I said before our margin opportunities.
Time for just a couple of more questions. Liberty, if there are any questions in (inaudible).
I have a question about the market share and on the last call you said, we look at them on a last 12 months basically. This seem like there has been some slowdown or may be some reverse in terms of market share versus Cisco. Can you give us your most detailed thoughts on why that is right now?
As we talked on the call about market share, I do think that you should look at on a quarter-by-quarter basis. I think you have to look at on a longer-term. Clearly, very frankly, we were able to take advantage of Cisco of specifically post acquisition of Tandberg, when they were working through personnel, product roadmap and the channel philosophy. Clearly, they have gotten through that and they are a better company to compete with today than prior. I believe, when we got our operating leverage with Microsoft, with HP, with IBM, we’ll be able to expand our reach and compete much more effectively in terms of market share gain.
Clearly, from a sales force, it’s about 10 to one in terms of Cisco versus Polycom, so it’s very important for us to get the leverage and that operating leverage of that market reach and that’s why we continue to reiterate the IBM, HP, Microsoft differential. We do believe that we’re going to go into 2012 with a pretence of at least market share neutrality and then grow into market share growth throughout ‘12 as we proliferate social media and the mobility etcetera.
So rather than looking on a quarter-by-quarter, I think it’s fair to say that we were able to take market share gains with Cisco is going through their integration issues. They came out of it, are better competitor now. For us to gain market share, we have to do two things; leverage IBM, Microsoft, HP and other partnerships such as carriers. We have to be able to really walk the street our campaign around the differentiation on the RealPresence platform. When we do that, we’ll start moving from market share neutrality to market share gain.
And there is time for a couple of more. Lets go to…
Phil, Wall Street.
Yeah thanks. I guess, I needed a little more help on understanding the network infrastructure piece of it, because there is a lot of change there, the cloud delivery model perhaps longer elongated cycle of revenue recognition, so a lot more changes there. I am just curious why you still say network infrastructure would continue to beat the piece of 15% of sales when you conceivably have deployments cloud based or you sell the end-points, book revenue on those and whereas the network infrastructure will take much longer time to actually recognize the revenues.
So if you could talk to the revenue recognition of various components in that division or that network infrastructure and also speak to why you think that there is going to be that positive mix shift to our PPN edge software when again the revenue recognition to meet is more elongated?
Let me start then Andy can particularly add on. So yeah that’s a good question because there needs to be clarity then. We are selling the RealPresence infrastructure platform product to Edge’s customers, the CPE customer brand, we’re selling it to the service providers that has been model that will continue to be the model, okay.
So to the extent that we’re doing and just for clarity to the extent that we’re doing some jump-starting around some kind of joint branded, white label cloud, that is a quickness to market up in the further frankly and the adoption that’s happening with video. So from a rev-rec model its revenue out the door when it goes, and so there is no complexity around rev-rec, it is shifting, it will book these revenue, we attach the maintenance contract in virtually all cases and that’s the ongoing model, that has been the model, that will be the model.
So why it would become a higher percentage of sales, that is being driven by the things that Andy talked about, so not only do you have the group systems, I actually want to come back to group systems to make sure that’s really clear as well. But if you look at what’s happening with iPad 2 to be specific and then others let so, but clearly, doing the Galaxy and some of these other technologies on Android, that is creating more – there is kind of the early phases of a network effect, there are just increased usage in ubiquity of video.
As that happens you do need more multipoint capacity, you do need more media management solution, you do need a whole bulk load of our – say not to use that kind of ends of marketing department either we do it, via main servers to be specific and that’s a SA server, softer on a server and you got to have it for your registration so that you have that secured interoperability of that so and there is no Polycom video on iPad that gives you all that great secure communication across your enterprise and B2B with other enterprises, without a real network of RealPresence platform.
So that is right, we believe the growth at a faster rate, by definition because there is a fast adoption of this technology. And frankly we are also finding that’s happening with that Phil, is that it is pull laying group systems for instance Immersive Telepresence is one of our fastest growing product lines in the company. So the OTX, the RPX and the ATX are solutions in that space. It is holding up, because what you find is with that network effect, with that ubiquity as an organization, we could name customer examples here and we will as we have clearance et cetera on pure and all that. As they deploy a lot of these tablet technologies, then video becomes a model of use inside of a company and that drives room system use as well because you've got people on the road, you've got people on their homes, whatever but they also need to connect with people co-located in meeting rooms as well. That can be a driver even for meeting rooms, but certainly you can see how it pulls up the RealPresence platform sales.
Thank you Mike. So we are up to our mark and I appreciate everyone’s patience as we’ve walked through our business model and for your excellent questions. For those again in Santa Clara that they got up so early and for those in New York that have taken the time to be with us, Mike and I, and Laura are here. Laura and Rama and others are out in Santa Clara, so feel free to enjoy lunch outside in Santa Clara. We call it brunch. We are here to ask, here to answer any questions you have. We appreciate your confidence in our company. If there's any clarity that is required from today's conference please work directly through Laura Graves and we will make sure to get your questions answered. So thank you and have a good morning and good afternoon.
Thank you everyone.
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