Polycom, Inc. (NASDAQ:PLCM)
Q4 2015 Earnings Conference Call
January 26, 2016 5:00 p.m. ET
Laura Graves - VP, IR
Peter Leav - President and CEO
Laura Durr - CFO
Tavis McCourt - Raymond James
Jess Lubert - Wells Fargo Securities
Mike Lin - Stifel
Ladies and gentlemen, thank you for standing by. Welcome to Polycom's Fourth Quarter and Fiscal Year 2015 Financial Results Conference Call.
[Operator Instructions] As a reminder, this conference is being recorded Tuesday, January 26, 2016.
I would now like to turn the conference over to Laura Graves. Please go ahead.
Good afternoon and welcome to the conference call for Polycom's fourth quarter 2015 financial results. This is Laura Graves, Vice President of Investor Relations.
And here with me today are Peter Leav, President and Chief Executive Officer, and Laura Durr, Executive Vice President and Chief Financial Officer.
Today's press release and the accompanying slide presentation can be found in the Investor Relations portion of our website. Investors and other interested parties should refer to these materials for additional supplemental information. These materials and a replay of this conference call will be maintained on our website for up to 12 months.
We will be making forward-looking statements on this call and during Q&A, including statements related to our strategy and vision, priorities and areas of focus, future investments, new product offerings, competitive advantages, future growth areas and opportunities, strategic partnerships, innovation and technological advances, overall market, economic and global trends, share repurchases, guidance, and our expectations regarding future financial and company performance, profitable growth, operational efficiency, and usage of capital. Each of these are subject to risk and uncertainties that could cause actual results to differ materially from our expectations.
We discuss a number of the business risks that may cause our actual results to differ in Polycom's most recently filed quarterly report on Form 10-Q for the quarter ended September 30, 2015. Any forward-looking statements must be considered in the context of such risks and uncertainties.
We will be presenting both GAAP and non-GAAP financial measures today. Please refer to our reconciliation of GAAP to non-GAAP financial results in today's earnings release which is posted on our website.
The availability of new products, planned features and upgrades discussed during this call are subject to change or cancellation. Polycom's products and reference specifications are not guaranteed and will be delivered on a when and if-available basis.
Now to begin the commentary on our Q4 2015 financial results, here's Polycom's President and Chief Executive Officer, Peter Leav.
Thank you, Laura.
Polycom reported overall revenue of $317 million in the fourth quarter of 2015, growing 5% sequentially. We saw a sequential growth across all three product categories, including double-digit growth in UC personal devices. In terms of geographies, all theaters grew sequentially.
Quarterly non-GAAP operating margin was 12.5%, improving both sequentially and on a year-over-year basis. For the full year, non-GAAP operating margins improved 8% versus 2014, and we concluded calendar year 2015 with eight consecutive quarters of year-over-year improvement in non-GAAP operating margins.
Non-GAAP diluted earnings per share were $0.23 in the fourth quarter. For the full year, non-GAAP earnings per share grew 6% versus 2014. Additionally, we generated $31 million in operating cash flow in the fourth quarter.
Last quarter, Polycom underscored its leadership in building the workplace of the future by announcing innovative collaboration solutions that combine enterprise-grade quality with unmatched simplicity and a unique human-centered design philosophy. For the first time in the industry, Polycom put people in the center of collaboration to transform the work space, experience and workflow.
In early January we had the pleasure of hosting our global channel partners and resellers at our annual Team Polycom event in Nashville, Tennessee. The event included in-depth sales training, product demos, and a co-presentation on stage with Microsoft executives. This was the first time many channel partners and resellers were able to see our newly-announced products in person, and the reaction was phenomenal.
As a reminder, our announcements included the Polycom RealPresence Trio, an innovative smart hub for group collaboration that transforms our iconic three-point conference phone into a voice, content sharing and video solution at an attractive price point to fit into any team environment. Q4 customer demand for RealPresence Trio exceeded our expectations, including orders from multiple Fortune500 companies. This early indication of acceptance is exciting given the opportunity to sell RealPresence Trio into an estimated 50 million huddle rooms and upgrade our installed base of over 5.5 million conference phones to a full voice video and content-sharing collaboration hotspot.
We also showcased Polycom RealPresence Debut, which brings enterprise-grade video collaboration to small and medium-sized business with the focus on simplicity and affordability. RealPresence Debut has an easy, elegant design that enables high-quality visual collaboration for organizations with limited IT resources. It's not only easy to use but can be set up in a matter of minutes and be connected to Polycom RealPresence Cloud. Together, RealPresence Trio and RealPresence Debut provide high-quality, highly-differentiated solutions to aggressively target the estimated 50 million huddle rooms across the globe, as well as expansion into the SMB market.
We have also begun taking orders for Polycom RealPresence Centro, the industry's first collaboration solution that is purpose-built to put people at the center of collaboration by utilizing Polycom's 360-degree voice and video technology, while also showing the entire meeting space on the same screen. RealPresence Centro creates a unique, natural and immersive way of collaborating that transforms meetings and drives better outcomes. It will begin shipping in the latter part of the first quarter.
These highly-differentiated endpoints are complemented with a brand-new simplified infrastructure solution that was announced at Team Polycom called the RealPresence Clarity. RealPresence Clarity is powerful collaboration infrastructure software for businesses of all sizes that transforms the selling, purchasing and deployment of collaboration infrastructure and connects people with HD voice, video and content sharing. RealPresence Clarity offers an industry-first hybrid cloud-bursting service to seamlessly manage spikes in demand, providing additional capacity whether planned or unplanned. It has broad interoperability, including Microsoft's Skype for Business and also boasts conference, content capture, and enhanced media recording capabilities. Whether it's deployed in the cloud or on-site, organizations can count on an excellent combination of user experience and ease of management. RealPresence Clarity takes collaboration to a new level.
We are delighted with the success of these launches, as well as customer, analyst and partner feedback, on our unique approach and differentiation. Polycom is delivering easy-to-use, superior and highly-differentiated solutions that bolster our product offerings. These innovations deliver outstanding benefits to customers and creates significant long-term opportunities for our business.
Now, turning to the geographies. In the Americas we saw 4% sequential revenue growth. This was a significant improvement from the prior quarter. Latin America continues to be challenged, particularly Brazil. The EMEA region posted 10% sequential revenue growth. As compared to Q3 we saw solid performances across EMEA, with the exception of the Middle East region. We continue to monitor the impact of foreign currency exchange rates on our business. In Asia, revenue was up slightly on a sequential basis, but down 13% year over year. We saw sequential growth in China but a significant decline on a year-over-year basis.
Polycom has a broad global footprint with many of the largest and most respected enterprise customers. I would like to highlight some of Polycom's key wins during the quarter.
A well-known Fortune50 company in the worldwide beverage, food and snack business chose Polycom in a million-dollar deal of Polycom RealPresence Centro, RealPresence Trio, infrastructure and services. After one meeting with our team, they discovered a clear path to integration with their Skype for Business environment. They were excited by our vision, new offerings, alignment to their business needs, and our innovation. This was a competitive win over Cisco.
NATO Communications and Information Agency enhanced their current Polycom network with Polycom RealPresence platform and Polycom RealConnect technology to bridge their video infrastructure with the Microsoft Skype for Business environment. They will also be one of the first customers to deploy RealPresence Centro, because international members of NATO speak a wide variety of languages, video is highly-effective for promoting clear communication. We are proud to be at the core of this network.
Another large government agency increased their collaboration capabilities with Polycom solutions by adding Polycom RealPresence Group Series Solutions in additional locations The network reliability and transparency offered by Polycom Visual Collaboration enables broader reach to a growing number of individuals who require the services of this government agency.
The subsidiary of a leading bank in Europe wanted a practical, unified collaboration solution that would integrate with Microsoft Skype for Business and maintain the seamless collaboration their customers valued. In a multimillion-dollar deal, Polycom provided the perfect solution, with the accessible, easy-to-manage and deploy Polycom RealPresence Group Series 310 with Polycom RealPresence Group Convene, along with our content sharing solution and services.
And finally, DEXUS Property Group expanded its offering of Polycom RealPresence Immersive Studios by adding immersive video collaboration capabilities to its new facility in Brisbane, Australia. The Polycom RealPresence Immersive Studio is the cornerstone within the unique and innovative DEXUS place offering, which has already successfully launched in Sydney and Melbourne. This is an important part of an ongoing partnership and a program to make the workplace of the future a reality for Australian businesses. At Polycom, our focus is to lead with differentiation and game-changing collaboration experiences that deliver value to our customers and drive profitable growth for us and our partners.
I would now like to turn the call over to Laura. Laura?
Thank you, Peter.
As reported, Polycom generated $317 million in revenue in Q4 2015, which was above the midpoint of our guidance. The Americas region, which represented 48% of total revenue, reported revenue of $153 million, up 4% sequentially and down 7% year over year. We saw sequential growth in the U.S. and Canada, offset by declines in Brazil and Latin America.
Our EMEA region, which represented 27% of total revenue, reported revenue of $85 million, up 10% sequentially and down 9% on a year-over-year basis. Russia and the Middle East were down significantly on a year-over-year basis. Excluding the impact of FX and Russia, the EMEA region would have been up 4% year over year.
Our Asia Pacific region, representing 25% of revenue, reported revenue of $79 million, up 1% sequentially and down 13% on a year-over-year basis. Led by China, the region struggled on a year-over-year basis, while India continued to show solid growth on a year-over-year basis.
In terms of product categories, inclusive of their service components, UC Group Systems revenues were $188 million, up 2% sequentially and down 14% year over year. UC Personal Devices revenues were a record $70 million, growing 10% sequentially and 5% year over year. UC Platform revenues were $59 million, up 8% sequentially and down 6% year over year.
Separately, services revenue was $90 million, down 2% sequentially and 7% year over year, due to the impact of lower product revenues in fiscal year 2015 and Halo-related managed services revenues. Maintenance renewals and new managed services were up sequentially and year over year.
Moving to the rest of the P&L, non-GAAP gross profit margins for the fourth quarter were 57.9%, down 50 basis points year over year, primarily due to higher revenue from UC Personal Devices.
Q4 non-GAAP operating expenses were $144 million or 45.3% of revenues, as compared to 46.1% of revenues in Q4 2014. Q4 non-GAAP operating income was $39.7 million or 12.5% of revenues, as compared to 12.3% of revenues in Q4 2014. Q4 non-GAAP diluted EPS was $0.23 per share, compared to $0.24 per share in Q4 2014. On a GAAP basis, Q4 diluted earnings per share were $0.11, compared to $0.15 per share reported in Q4 2014.
With respect to the full year of 2015, revenues declined 6% year over year, while non-GAAP operating margin improved 8% and non-GAAP and GAAP diluted earnings per share grew 6% and 67%, respectively.
Turning to the balance sheet, we exited the fourth quarter with total cash and investments of $666 million, of which 35% or approximately $232 million is located in the U.S. Net of existing debt, total cash and investments were $431 million at the end of Q4 2015.
Polycom generated $120 million in operating cash flow in 2015, including $31 million in fourth quarter. Stock repurchases for calendar year 2015 totaled $90 million. No common stock was repurchased in Q4 and Polycom has $60 million in remaining stock repurchase authorization.
Polycom's total shares outstanding as of December 31st, 2015 were 133 million shares. Polycom's Q4 2015 weighted average diluted share count for EPS calculation purposes was 137 million shares. Additional financial and operating information is available in today's press release.
Now moving on to guidance for Q1 2016. Please note that the financial guidance provided on this call is valid as of today only and Polycom will not provide updates to this guidance regardless of changes that may occur in the future.
The key considerations for Q1 2016 guidance include the following. Normal Q1 seasonality, which typically results in lower revenue sequentially. Increased macroeconomic and political pressures globally, specifically in China, but also conscious of Russia and the Middle East. Timing of recent product announcements, the competitive landscape for the Group Video business, and finally we are mindful of volatility in foreign currency exchange rates and the strengthening U.S. dollar, including the year-over-year decrease and the rates at which we have hedged our anticipated euro and British pound revenues and expenses.
For Q1 2016 guidance, we expect the following. Revenue ranging from $295 million to $305 million. Non-GAAP gross profit margin ranging from 57.0% to 57.3% of revenues. Total non-GAAP operating expenses ranging from 46.4% to 46.0% of revenues. Non-GAAP operating margin ranging from 10.6% to 11.3% of revenues. Both a GAAP and non-GAAP tax rate of 20%. Interest and other income and expense is expected to be a net expense of approximately $1.2 million.
And the share count for earnings per share is expected to be an estimated 136 million diluted shares, excluding any additional share repurchase activity. We expect non-GAAP EPS ranging from $0.18 to $0.20 per share. And we expect GAAP EPS to range from $0.02 to $0.04 per share.
Additional financial information, including GAAP line item guidance, is available on the supplemental financial materials in the Investor Relations portion of our website.
Now I will turn the call back over to Peter. Peter?
Thank you, Laura. In 2015 we invested in our business to produce a suite of innovative solutions, including Polycom RealPresence Trio, RealPresence Debut, RealPresence Centro, and now RealPresence Clarity, as well as major enhancements to our Group Series offering, including Touch and our market-leading user experience interface RealPresence Concierge.
We also continued our relentless focus on improving operating performance. Our customer focus, experience, knowledge and vision for this industry provide us a distinct competitive advantage. We look forward to continuing to bring this vision to life with innovative solutions that meet the demands of customers around the globe.
Looking ahead to 2016, you should expect us to continue our focus on operational efficiency, including appropriate investment in core and adjacent market solutions. We also expect to continue our close partnerships with Microsoft and other strategic partners. And we'll continue to be good stewards of our capital.
We appreciate your support and ongoing commitment to Polycom. Operator, we are now ready to begin the Q&A portion of our call.
Thank you. [Operator Instructions]
Our first question comes from the line of Tavis McCourt with Raymond James. Please proceed.
Tavis McCourt - Raymond James
Hey everybody, and thanks for taking my question. Laura, I've got two financial ones for you, and then wanted to touch on a product-related question for you, Peter.
On the financial ones. The DSOs were up quite a bit in the quarter, and I'm just wondering if that was just due to the linearity in the quarter or something else driving that and where should we expect those ending in March. And then the other thing that stood out in the cash flow statement was not a lot of share buybacks this quarter. Was there any specific reason for that? Should we -- we'll be baking those in going forward?
And Peter, I guess for you, the Trio obviously is the one that most thought would see early success, and you mentioned some of that on the call. Can you give us a sense of kind of production ramps and, you know, how many quarters will this take to become meaningful, and for kind of supply to meet demand based on what you're seeing right now? Thanks.
Thanks, Tavis. This is Laura. I'll start with the DSO.
Yes, DSO was up to 54 days during the quarter. That is outside of what we would normally expect to see. It was largely linearity driven, particularly in EMEA and APAC. And I would say that a lot of that was also driven by the fact that we went live on our Oracle system during the quarter, which we cut over at the end of October, early November, and that caused some billing delays which drove that. So we will obviously, you know, we've historically managed to be below 50 days, and we're mindful of that and we're going to continue to be focused on that. So, hopefully this will be an anomaly that you'll see.
With respect to the share repurchase, we did not buy back any shares during the quarter. However, out of the $120 million in cash that we generated for fiscal 2015, we purchased $90 million worth of share for the full year, and we still have $60 million remaining in our buyback.
Peter, I think --
Great. Thanks, Laura.
Tavis, the question on Trio, regarding early success and then production ramps and supply meeting demand. So we were pleased with the start. And as you recall, we only had a portion of Q4 to ship the product, and we also have -- still got a number of geographies that are going through homologation, etc. So we won't reap the benefit of full Q1. But both as it relates to prospects and, as importantly, major accounts, we're seeing terrific traction. And some of that is coming in opportunities that exist to go after a competitive base, with a solution like Trio that no one else frankly can match, because we bring a price point and voice, video and content to the smart hub device that's meeting the needs of a wide range of rooms that frankly had not been touched. As you'll recall, only 4% of the 50 million conference rooms have video today. So it's very additive, and we're very pleased with the start that we've had.
That will ramp over the course of the year of course, both as it relates to readiness in certain geographies and when we start to see the expansive opportunities that come in the middle of the market as we're also working diligently to make sure that we've got the supply chain ramped for additive and net new outside of the confines of major accounts.
The other piece that is going to be a positive and a shot of adrenaline over the course of the upcoming year is Microsoft launching their Cloud PBX. And as they've gone out and been very evangelical about being in that space, they've also brought Trio with them, and that is part of that solution, and it will be, and it's native. And obviously we've got that ready to go today with Skype for Business but it'll be part of what Microsoft is also launching, and they're very excited to have that as part of their capability. It was the only non-Microsoft component that was part of that launch.
So from a supply chain perspective, we're equipped and we expect to do well and expect Trio to do quite well over the course of the year.
Tavis McCourt - Raymond James
Great. Thanks, Peter.
The next question comes from the line of Jess Lubert with Wells Fargo Securities. Please proceed.
Jess Lubert - Wells Fargo Securities
Hi guys. Also have a couple of questions.
First, for Laura, gross margins were fairly weak in the quarter and it seems like you're expecting some further deterioration in Q1, so was just hoping to understand what you're seeing from a mix and/or pricing perspective, to what degree the strengthening dollar might be impacting the way you need to price to win business overseas. And, you know, maybe just following up on Tavis's question, you know, were there any restrictions on the buyback in the quarter?
Okay, so, Jess, let me start with the gross margin question. So, gross margins for the quarter were 57.9%, that's down call it 50 basis points year over year. You'll recall Q4 is typically our lower gross margin quarter. We've done a relatively good job at keeping gross margins in a tight band [ph], but as we've talked about, you know, gross margins are going to move around a little bit depending upon mix, mix and the product categories, mix within those product categories, geographies, various things. And in this particular quarter, we did have - see a higher mix of UC Personal, and that was a large driver for the gross margin.
As far as our guide for Q1, I think we have our normal seasonality, we'll see a sequential decrease in revenue, revenue will likely decrease as it historically does from a Q4 to a Q1. And again it will be affected by mix. And based on our assumptions of mix today, we think that's the appropriate level in which to guide, because we do have an FX headwind still.
Jess Lubert - Wells Fargo Securities
And the buyback, was there a restriction, and is it fair to assume that you're expecting a greater mix of personal revenue in Q1 then, just based on the mix comments?
I think that, you know, we don't guide by category, but we certainly take into consideration a number of scenarios as we come up with the guidance.
As far as the buyback, don't have any particular reasons that I would provide, other than we've done $90 million for the year out of the $120 million we generated in cash, and we've got $60 million remaining on our buyback.
Jess Lubert - Wells Fargo Securities
And then, Peter, if we back out Trio sales, can you help us understand if UC Group revenue would have been flat, up or down sequentially? And with the new products coming to market, would love to get a sense of, you know, how you feel you stand from a competitive perspective relative to Cisco, to what degree their acquisition of Acano changes the dynamics, and if you can just touch upon the sequential improvement in the UC Platform business, what drove that, if you think that can continue in 2016, that would be helpful. Thanks.
Okay. So I think there were a few questions embedded in the question, Jess, but let me hit on it, and if I missed it, come back please.
So, first and foremost, from a Group perspective, as we look at each category, and Laura just talked a little bit about UC Personal, another record set for UC Personal, and obviously an improvement both year over year and quarter over quarter. From a Group perspective, we saw, I would say, a more challenged Group story and we expect that to start to remedy itself as the year goes on. Much of the investment that we described has come in the UC Group category, obviously Trio being a component, Debut, Centro which is not yet shipping, which is getting rave reviews as well, and the enhancements to Group Series with features like Touch and Acoustic Fence.
So we've got a number of elements that are not in line with what anyone else provides to the market. We feel very good about that. And with some bridging technologies like RealConnect and what we just announced with Clarity, we're finding the customers, as they move to applications and Skype for Business and Office365, away from traditional infrastructure and away from traditional telephony, IP PBX and PBX, they start to have additive video needs, and that becomes very important. And we see opportunities with our new solutions to leapfrog what our competitors have done.
So I would say from a video standpoint, on the endpoint front, it was a weaker quarter. On the UC Personal side, I think it was another good quarter as we've continued to invest in that space VVX 102, VVX 201 came out, they're both helping in a significant way, both with Open CIP [ph] service providers, as I discussed the voice transition, and with Microsoft.
And then as you asked a little bit about platform, we feel quite good about where transitions provide us opportunities to help customers in a more substantive way. I think it's fair to say that the Acano bridging component is being questioned in a different way now that it's part of a more homogeneous environment and likely will be. So as far as bridging opportunities where customers are moving to the likes of Skype for Business, we're very happy with what we just brought to market with Clarity, with Hybrid Options and with RealConnect. And yeah, thanks for the comment on platform. It was a good story quarter over quarter. And I think the Platform team was absolutely on track with the investments we've made and how they projected we would do this quarter. And that was, you know, that was a step in the right direction, and I think you'll continue to see us helping customers make those moves.
Jess Lubert - Wells Fargo Securities
Based on the interest in some of the new UC Group and UC Platform products, do you think it's reasonable that these businesses can get back to growth as you get into the second half of the year, is it too early to shoot for that objective?
Yeah, we're not going to guide, considering the environment that we're in, beyond the current quarter, but we certainly see opportunities to improve. And I would also comment that the compares become more favorable as the year goes on. So I'll leave it with that.
Jess Lubert - Wells Fargo Securities
The next question comes from the line of Mike Lin with Stifel. Please proceed.
Mike Lin - Stifel
Hi. First question I had was regarding the UC Personal Device. Obviously you guys put up good growth quarter over quarter. But on a year-over-year basis, it looks like the growth has been decelerating the past couple of quarters. Could you just kind of give some comments regarding what's causing that deceleration and whether you expecting things to pick back up now that you've released a new VVX line of products?
Thanks for the question, Mike. So, just to comment on UC Personal more generally, we've been I think asked this question probably the last eight or nine quarters, and that business continues to do very, very well. And if trend it and you look at where we were and where we are, inclusive of the investments that we decided to make roughly two years ago, I think it's very clear that that business has done quite well, as that market has done quite well.
And again it gets back to a market phenomenon that's really important, and that is telephony is transitioning, audio is transitioning, and cloud players and Open CIP [ph] services providers are continuing to win. And we believe that will continue to be the case, and we believe the likes of Skype for Business will continue to win, and alignment with those players is a good model for us. It's a good operating model for us and it's a good cost model for us, and it's a good growth model for us.
So that business in this quarter just set another new record. We set several records over its long continuum in the last several quarters. Year over year, on a full year basis, that business grew 13%.
So we'll have ebbs and flows on a quarterly basis. Demand continues to be quite solid. And we've certainly proven I think that investing in that space and our model through our partnerships with service providers, Open CIP [ph] cloud players and Microsoft, is turning out to be quite good, and certainly has been a good story as it relates to the 13% growth we saw year over year.
Mike Lin - Stifel
Okay. And just on the OpEx side. Obviously you guys have been very good in kind of controlling costs, especially on the R&D side throughout 2015. I guess going forward, if on the top line you see, you know, flattish or slightly declining revenue results. Should we kind of expect or model in R&D to continue trending down, or -- on your commentary earlier, I think you indicated you would continue investing in your products and adjacent products as well, so, how should we kind of think about OpEx, especially on the R&D side going forward?
So this is Laura. I think in total, if you think about it, as you said, you know, we've done a good job of managing our operating expenses and looking at the levers up and down our P&L. We haven't necessarily guided for any particular quarter -- for any particular quarter by category, but I think that we will continue to make smart investments and make sure that we're reinvesting those dollars in the right areas. As you saw, we came out with a number of excellent products during 2015. We'll continue to make the right investments that are accretive and differentiating for us and we'll continue to make sure that we're watching the P&L.
Yeah. I think Laura summarized it well. And I'd also say that, as it relates to R&D, the team has done a very, very good job of recycling dollars into accretive areas with great returns, and been very deliberate about that. And we're working diligently to do that across the entire Company. So we'll continue to be great stewards of our cash as well as great stewards of the optionality and looking at what makes the most sense from an investment standpoint, but we are going to continue to invest in solutions that will help us win and bring differentiation to the market. And we think there are ways to optimize that cost structure, we've certainly proven that. And we'll continue to look at the best ways to do it.
Mike Lin - Stifel
Okay. Thank you.
And Mr. Leav, there are no further questions at this time. I'll turn the call back over to you for your closing remarks.
Thank you. And thank you for joining Polycom's Q4 2015 conference call. We appreciate your support. We look forward to speaking with each of you again soon. Thanks very much.
Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.
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