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Polycom, Inc. (NASDAQ:PLCM)

Q2 2007 Earnings Call

July 19, 2007, 5:00 PM ET

Executives

Robert C. Hagerty - Chairman, CEO and President

Michael R. Kourey - Sr. VP, Finance and Administration, CFO

Analysts

Jason Ader - Thomas Weisel Partners

Troy Jensen - Piper Jaffray

Sanjiv Wadhwani - Stifel Nicolaus & Company

William Choi - Kaufman Bros., L.P.

Scott Sutherland - Wedbush Morgan Securities Inc.

Tavis Mccourt - Morgan, Keegan & Company, Inc.

John Anthony - Cowen and Company

Presentation

Operator

Ladies and gentleman thank you for standing by and welcome to the Polycom Q2 Earnings Results Call. During this presentation, all participants will be in a listen-only-mode, after which we conduct a question-and-answer session. [Operator Instructions]. As a reminder, this conference is being recorded, Thursday, July 19th, 2007.

I will now turn the conference over to Chairman and CEO, Mr. Bob Hagerty. Please go ahead sir.

Robert C. Hagerty - Chairman, Chief Executive Officer and President

Good afternoon everyone and welcome to Polycom's second quarter earnings call. I'm Bob Hagerty, President and CEO and here with me is Mike Kourey, our Chief Financial Officer.

Michael R. Kourey - Senior Vice President, Finance and Administration, Chief Financial Officer

Hello everybody.

Robert C. Hagerty - Chairman, Chief Executive Officer and President

As with previous quarterly calls, we are again augmenting today's voice conference call with a webcast. If you'd like to receive the webcast, please open your web browser at this time and enter Polycom's homepage, which is polycom.com and click on the Q2 earnings call. Then follow the instructions provided. For the analysts participating in the Q&A session, leave your call live so that you can use your conference call connection for the Q&A session at the end of our call. Please note that Q&A is for financial and research analysts. We welcome all others to listen in to the Q&A session. Please also note that this entire webcast including Q&A will be maintained on Polycom's website for 12 months from today for your convenience and replay.

Most of you participating in the call are aware of federal legislation regarding forward-looking statements. Accordingly, we would like to note that during the course of this conference call, Mike and I will make forward-looking statements and present forward-looking visual materials regarding future events, anticipated future trends, future product offerings or the future performance of the company including financial guidance. We wish to caution you that such statements and visual materials are just predictions that involve risks and uncertainties, and that actual events or results could differ materially. We discuss a number of these risks in our business in detail in the company's SEC reports, including most recently in the company's Form 10-Q for the quarter ending March 31st, 2007, and any forward-looking statements must be considered in the context of such risks and uncertainties.

Also please note that Polycom's application of U.S. Generally Accepted Accounting Principals or U.S. GAAP requires disclosure that the availability of new products, planned features and upgrades discussed during this call are subject to change or cancellation.

To begin, I'd like to provide our second quarter financial highlights. Revenues for the second quarter were a record $233.9 million representing a 21% sequential increase from the first quarter revenues and a year-over-year growth rate of 42%.

In Q2, our new SpectraLink product line generated revenues of $36.4 million. Excluding these revenues, revenue was up 4% sequentially and 20% year-over-year. Backlog was $47.6 million, essentially flat sequentially and up $32 million year-over-year. Deferred revenues increased to a record $75.5 million and were up 5% sequentially and 26% year-over-year. With our record revenues, and our gross margins at 61.3% in Q2, Polycom posted non-GAAP earnings of $0.30 per diluted share, representing a 25% growth in EPS year-over- year.

In the second quarter, we shipped a record 19,582 group video units comprised of our world leading HTX and VSX product lines. On the desktop video front, we shipped a record 12,722 units and seats in the second quarter. A significant Q2 highlight is that network systems returned to growth in the second quarter, increasing 8% sequentially and growing 2% year-over-year. Later in the call, Mike will go through the financial results in detail.

At this point, I'd like to update you on the excellent progress we're making with the integration and contributions of SpectraLink Wireless LAN voice products. First, from the fundamental integration stand point, we have already integrated the working teams in sales, engineering, operations and finance. In fact, we've already begun to experience early G&A synergies through this combination and are beginning to take the initial steps to capture the channel synergies.

On the product side, we have already begun to see the early costumer facing synergies through our recent and first in industry pre-validation for FIPS 140-2 certification which is important for sales in U.S. government agencies. On the commercial side, we've already began to experience cross-selling synergies. For instance, Duke Energy's McGuire nuclear station is rolling out Polycom LAN phone... Wi-LAN phones throughout their plant. Also Washington Mutual's staff office people are using Polycom Wi-LAN phones to provide the mobility they need throughout their branch office environment. And these are only two examples of our Polycom's Voice-over-IP strength can be leveraged with the addition of SpectraLink Wi-LAN product line.

From a cost of goods perspective, we are moving aggressively to an outsourced Asia manufacturing model for these wireless phones. This is scheduled to be complete in the fourth quarter, which should provide further improvement to our gross margins in this product area. As a result of the team's rapid integration and our early customer success, I am pleased with the early validation is exciting, fast growth addition to Polycom.

Continuing the voice product area, I'd like to briefly discuss our growing partnership with Microsoft. As you may know, we're already delivering integrated Video-over-IP solutions through our network systems products and our PVX desktop video software. In addition to these joint activities, we've also launched into public data testing for a range of voice products that integrates with Microsoft's Office Communication Server 2007.

Integrated with Microsoft's software powered VoIP solution, Polycom's new line of products include the CX100 affordable speaker phone peripheral, the CX200 speaker phone and handset, the CX400 cordless desktop handset and the CX700 executive IP telephone. Working closely with Microsoft, we're excited with the early deployments and look forward to the full public launch of these products later this year.

Switching gears to the video product area, I would like to discuss the exciting solutions coming from Polycom's newly created video solutions business. This combined video and network development team now form the powerful and prolific new product's engine for Polycom. First, we have the fast growing 9000 series high definition video platform. This leading HD product grew sequentially by more than 20% in the second quarter, illustrating the customer's appetite for high definition video communications in mission-critical applications. Second, our RPX telepresence product is gaining significant attention from C level management at large enterprises in the financial, consulting and entertainment sectors, just to name a few.

Even with its roughly six-month sales cycle, we are already beginning to see what this technology can add to Polycom in the second half of 2007 and into 2008. The RPX telepresence solution like the XEX... HDX high definition product provides leading technology choice and the most natural face-to-face communications experience for our customers.

Importantly, driven by our innovations in telepresence in HD, Nortel has selected Polycom as its solution provider for its new multimedia services portfolio. This agreement with Nortel covers Polycom's entire line of video conferencing solutions including telepresence, conference room in desktop video, network management and streaming of video conference content. Nortel's President of Global Services, Dietmar Wendt said and I'm quoting here, Teaming with Polycom, Nortel can deliver comprehensive video conferencing solutions and services that provide more efficient and effective communications across the globe, improving an organization's productivity and business reach while delivering significant savings in network operations. This relationship with Nortel augments our already strong relationship with the buyer and several other key management providers.

On the network side of our new product engine, we've recently announced several new products in the area. For instance, our new RMX 2000 real-time media conferencing platform is already proving to be a strong addition to our network systems offerings. With the tailwind of fast adoption of IP based video communications, the RMX is a video network solution that significantly reduces latency. It easily is managed with a simple web interface and offers a flexibility of a pool of DSPs architecture. In addition, the RMX is software upgradeable to HD continuous presence with full transcoding.

Founded on the same architecture as the RMX, earlier this week we announced Proxias, our new IMS complaint application server for on-demand rich media conferencing services. This flexible carrier class platform enables service providers to cost effectively deliver rich media conferencing services across geographies as a part of a unified communications environment. Notably, with Polycom's number one position in this market, Proxias enables us to deliver next generation solution to further support our service provider customers with their unified conferencing offerings, which has grown worldwide to 50 million minutes of conferencing per day. Polycom's new Proxias platform will be available next month and adds to our innovative network systems offering at a time when demand for capacity is increasing.

In concert with the high definition drivers of this market, we also recently announced the ReadiManager SE200, adding support for RMX 2000 and our HD video offerings. In addition, we announced our new Video Media Center, the VMC 1000 that allows organizations to centrally manage, leverage and protect video content. The bottom line here is that Polycom is addressing the unprecedented customer demand for IP-based collaboration with a broad array of innovative, highly differentiated high definition solutions across our range of voice, video, content and networking products. In fact, Polycom is a world leader and is the only company with this perfect solution is positioning us to... well to best serve our customers' collaboration needs. With our flexible architectures, our unparalleled integration and our software upgradeability, Polycom is poised to continue to capture this fast growth market opportunity.

As a final note, our newly formed video solutions business is structured to address our customers' needs, an integrated video solution from the desktop to the meeting room to the network core. Organizationally, this structure will also yield an execution model that is effective and efficient, which should deliver operating synergies in product planning, research and development.

On that note, let me turn the call over to Mike Kourey for a discussion of Polycom's financials. Mike?

Michael R. Kourey - Senior Vice President, Finance and Administration, Chief Financial Officer

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

Moving to a look at our results, as Bob stated earlier, revenues for the second quarter were $233.9 million. This represents a sequential revenue increase of 21% and a growth rate of 42% over Q2 of last year. These Q2 revenues include a full quarter or $36.4 million of SpectraLink revenues. Excluding SpectraLink, Polycom grew 4% sequentially and 20% year-over-year.

On a product line basis, which includes the service elements of each product line, revenues for video solutions were a record $144.3 million, up sequentially by 6% and up 21% year-over-year. Video Solutions is comprised of Video Communications and Network Systems. Of these product lines, video generated a record $113.3 million in revenues, up 5% sequentially and 27% year-over-year. Significantly, the Network Systems product line returned to growth in the quarter with $31 million in revenues, up 8% sequentially and 2% year-over-year.

The Voice Communications business also generated record revenues at $89.6 million, representing a 60% sequential increase from Q1 and a 96% increase from the year ago period. Excluding SpectraLink revenues, voice revenues were $53.2 million, representing a 2% sequential decrease and a 16% year-over-year growth.

Linearity was strong in Q2 with 44% of revenues in the last month of the quarter. This represents a 1 percentage point sequential improvement and is up a percentage point from the year ago period. Polycom exited Q2 with $47.6 million in backlog, essentially flat with Q1 and up 32% year-over-year. Polycom's deferred revenues grew to a record $75.5 million in Q2, increasing 5% sequentially and 26% over the year ago period. These results highlight a continuing momentum that we've seen in video, driven by pervasive IP connectivity and ramping high definition demand. We believe these results also illustrate the success in Polycom's new Voice over Wireless LAN business, an early validation of the strategic expansion of our world leading voice offerings.

Moving to revenue by geography; in the second quarter, North America revenues grew 33% sequentially and 48% over the year ago period. EMEA grew 8% sequentially and 41% over the year ago period. Asia revenues also grew by 8% sequentially and a significant 24% year-over-year. Latin America once again generated strong growth, up 2% sequentially and up a significant 51% year-over-year. Excluding SpectraLink revenues, North America grew 7% sequentially and 17% over the year ago period. And EMEA declined sequentially 8%, but grew 19% over the year ago period. In the second quarter, Asia and Latin America did not yet have any SpectraLink revenues.

From the channel standpoint, the revenue breakup for the second quarter is as follows. 36% through value-added resellers, 52% through distributors, 5% through service providers and 7% direct. We are pleased with our strong growth in Q2. Video-over-IP is continuing to be a significant driver, while Network Systems is just beginning to see a resurgence. Voice-over-wireless LAN already began to contribute to our result albeit causing a brief distraction in the voice arena during the quarter.

Other core drivers of our revenue momentum are high definition, telepresence, Voice-over-IP and our new RMX media conferencing network platform.

In summary, the mission critical status of IP-based collaboration is evident in our business and we believe can stand to continue to drive Polycom, the world wide leader in the space in the second half and beyond.

Looking forward, we believe that many of these drivers are at their early stages. And with our integration of SpectraLink substantially complete, and having the benefit of a full sales cycle of the RMX network and telepresence products, we expect strong growth in the third quarter. Based on these revenue drivers and the market momentum we're experiencing and in spite of summer seasonality, we expect revenues to increase sequentially by 4% to 5% in Q3.

Moving to the statement of operations, gross margins for the second quarter was 61.3% including the full quarter of SpectraLink handset revenues. Breaking out the gross margins by product family, our Network Systems product line continues to have targeted gross margins in the high 60s range. Group Voice and Video Communications products have gross margins target in the high 50s to mid 60s range while desktop voice and service gross margins are targeted in the low 40s range. Through the second quarter, Network Systems and service operated above their target ranges and voice and video operated within their target ranges. Of course gross margins in the future maybe higher or lower and sets to mix variations and other factors.

Switching gears to non GAAP operating expenses for the second quarter, Polycom's operating expenses increased sequentially in Q2. Looking at the specific non-GAAP operating expense write-downs for the second quarter, sales and marketing represented 25.1% of revenues for the period, the same as Q1. For the period, R&D closed at 14.2% of revenues, down from 14.6% in the first quarter. G&A, with 6.1% of revenues, up from 5.4% in Q1. In total, Q2 non-GAAP operating expenses represented 45.4% of net revenues in the second quarter, up as a percent of revenues from 45.1% in the first quarter.

Moving to a look at the company's operating income, Polycom generated a second quarter non-GAAP operating income of $37.2 million or 15.9% of net revenues. This result represents a 44.5 % growth in operating income from $25.7 million in non-GAAP operating income in Q2 of 2006.

As a recap of our performance against our previously stated long-term target model, we are just above the middle of our target gross margin range of 59% to 63%. Sales and marketing operated within its target range, R&D operated 2.2 percentage points above its target range, G&A operated 0.1 percentage points over its target range.

Excluding acquisition-related costs, the effect of stock-based compensation expense on warranty rates, amortization and parameter perks intangibles, stock-based compensation charges, restructuring charges, and certain other charges, Q2 non-GAAP net income was $28.9 million. This represents a 32.4% growth from 21.9% in non-GAAP net income in the comparable period last year. Non-GAAP diluted EPS in Q2 of $0.30 grew by 25% from $0.24 per diluted share in Q2 of 2006.

GAAP profitability for the quarter was $10.1 million or $0.11 per diluted share in Q2 of 2007 versus $15 million or $0.17 per diluted share in the comparable period last year. Note that Q2 2007 GAAP net income includes a $7.4 million write-down of a strategic investment that was not incurred in Q2 of 2006.

Looking forward to the third quarter, we anticipate that gross margins will remain roughly at Q2 levels. In the third quarter, we expect to continue to invest in the sales and marketing area, increasing sales coverage with additional high-tech sales managers in fast growth geographies and customer segments. We expect R&D and G&A to only experience slight spending increases in the third quarter. With this backdrop, we anticipate operating margins to increase to 17.1% to 17.3% in Q3.

Moving to tax guidance, you'll notice that our Q2 tax rate was 29%, driven by our global mix of profits. Looking forward, we expect our effective tax rate to return to 28%. Of course, this 28% rate is subject to change based upon changes in geographic mix as well as changes resulting from any new U.S. and international regulations or interpretations.

Other income for the second quarter was $3.6million. We expect other income to grow to roughly $3.9 million in Q3.

Moving to the balance sheet; in the second quarter, Polycom generated $34.9 million in positive operating cash flow, representing Polycom's 38th consecutive quarter of positive operating cash flow. This strong Q2 operating cash result was driven largely by our strong profitability and ongoing receivables and inventory management. Cash investments at the end of the second quarter totaled $371.1 million.

Moving to DSO; driven by our strong Q2 linearity, the company's net trade receivables of $114.7 million had a DSO of 45 days, representing an improvement of three days sequentially and up two days from the year ago period. Looking forward, we are continuing our best-in-class DSO guidance of 40 to 50 days.

Inventory turns at the end of the second quarter was 5.3 turns. Over the next few quarters, we expect to see gradual improvement in the inventory turns toward our guidance of six to seven turns.

Regarding expected share account, we expect Polycom's weighted average shares per diluted EPS to grow by approximately 750,000 shares per quarter exclusive of stock repurchases. During the second quarter, we purchased $25.7 million of our common stock. Note that we have an authorization to purchase approximately an additional $240 million of our common stock against the $250 million share buyback authorization given by our Board in May of 2007. In addition to future potential buybacks of our stock, our share account will change based on Polycom stock price and the acquisition activity and other factors.

Moving to headcount, Polycom had 23,71 employees at the end of Q2, representing a net increase of 15 employees over the prior quarter. The additions we made were primarily in the customer facing areas of sales and service. Looking forward, we expect to continue to invest in sales and service headcount, enabling further capture of the growing demand for our IP-based collaboration solutions.

As the final note on the financials, we have presented both non-GAAP and GAAP financial measures here today. Non-GAAP financial measures exclude amortization and impairment of purchase intangibles, purchased in process, research development costs, restructuring costs, stock-based compensation charges, the effect of stock-based compensation expense on warranty rates, impact of cost of sales and purchase accounting adjustments to inventory, litigation reserves and payments, acquisition-related cost, gain-loss on strategic investments, and the income tax of the proceeding adjustments. Please note that our reconciliation of our non-GAAP financial measures to the related GAAP financial measures will be maintained on our website for 12 months from today at polycom.com under Investor Relations archived conference call.

At this time, I'd like to turn the call back over to Bob Hagerty for closing comments.

Robert C. Hagerty - Chairman, Chief Executive Officer and President

Thanks Mike. In summary, the backdrop of our IP-based collaborative communication is the best in history. Enterprises, governments, and educational institutions alike are adopting video, voice and content collaboration to enable them to achieve greater agility, faster growth. Drivers such as high definition and telepresence are serving to catalyse this growth through an unprecedented quality of experience. In Q2 this was evidenced by the continued fast growth of our video business and the continued... and the return to growth of our Network Systems products.

Our newly acquired Voice-over-Wireless business also generated strong revenues in Q2 as we began to integrate these solutions into the broader Polycom portfolio. Looking into the second half of 2007 I couldn't be more excited about the increasing customer coverage and our breadth of our new products offerings. These products include the RMX, high definition, multimedia conferencing platform, the new Proxias service provider, the unified bridging platform, the HDX high definition video products, the RPX telepresence products and the suite of new voice products from the line of Microsoft VoIP phones to a new line of wireless LAN voice offerings.

With the strong market dynamics, Polycom's strategic partnerships, our industry leading products and our ever increasing sales coverage we believe that we are poised to have the fastest... a fast growth in the second half and 2008. On that note, we would like to open the floor to financial and market analysts for any questions that you may have. For all others we invite you to stay on the call and listen in. Of course as we've discussed earlier in the call many of the statements we've made and will make during the Q&A period are forward-looking statements which are subject to many risks and uncertainties. Is the conference call operator available at this time?

Question And Answer

Operator

Yes sir, I am right here. [Operator Instructions]. Our first question comes from the line of Jason Ader of Thomas Weisel Partners. Please go ahead sir.

Jason Ader - Thomas Weisel Partners

Great, thank you. You got half of that right. So for the recorded year, Mike and Bob I am kind of struggling with the numbers. It feels like there was a kind of a modest deceleration in the business in Q2 with backlog being flat, here again in deed was lower than it's been over the last three quarters and then you gave strong guidance. I guess the first question is what's baked in for [indiscernible] in the guidance?

Robert C. Hagerty - Chairman, Chief Executive Officer and President

So you want to cover the guidance portion of that?

Michael R. Kourey - Senior Vice President, Finance and Administration, Chief Financial Officer

Yes. So from the guidance stand point, we are not splitting that out. I mean you know the history of SpectraLink standalone I am sure from the public reporting last year, as you may know they had a nice sequentials in Q3 plus there is also a lot of the work that we've done obviously from the distraction standpoint, I've touched on that briefly in the voice area, we expect that to be momentary, based on the pipeline that we have and yes, while so into the month of July here as we have this call. So those are the factors that yields the guidance that we have of 4% to 5% all in consolidated sequentially.

Robert C. Hagerty - Chairman, Chief Executive Officer and President

So on top of the business that we were delivering in Q2 we also had some large deals that we have been watching come through the pipeline. The nice thing about the telepresence solution is that it brings a fairly large package for us to be able to demonstrate to executives how they can improve productivity and pull through other video solutions to create a much bigger solutions. So we have good confidence on what we've see in our pipeline and the deals that are working their way through to conclusion in the third and fourth quarter and on into 2008.

Jason Ader - Thomas Weisel Partners

So the voice business being up 16% year-over-year is below kind of where it's been, excluding SpectraLink, we shouldn't be looking at that as beginning of a trend?

Robert C. Hagerty - Chairman, Chief Executive Officer and President

I don't think so. I think that we saw... clearly the management team spend a lot of time in integrating SpectraLink spending a lot of the time with employees, some organizational adjustments that were made which was somewhat of a distraction and so we are pleased with the results so far, we have all the sales out reports we are looking at the way the products' flowing through and I think we are in good shape. So I don't view that as a trend, so we're not seeing any trends from a market perspective that would indicate that there is any major move being made in the voice-over-IP or in the conference room business or in the wireline business. In fact, they all look strong.

Jason Ader - Thomas Weisel Partners

Okay. I just... I think it's important for us to ask that question, because, you know obviously the bear case on the SpectraLink was that you did it to hide maybe a slow down in the organic voice business, so I guess we just had to see how you do over the next couple of quarters and do you disprove that or not?

Michael R. Kourey - Senior Vice President, Finance and Administration, Chief Financial Officer

Alright, although we obviously have had a tremendously long stream of very strong growth in the voice business, we are talking one quarter here during the distraction of the quarter of integration, we got not substantially complete this point, so I don't think after so many quarters of such a strong trend one quarter should lead any one to that view.

Robert C. Hagerty - Chairman, Chief Executive Officer and President

Yes, I think across it's an anomaly, and one shouldn't grab a trend out of one data point.

Michael R. Kourey - Senior Vice President, Finance and Administration, Chief Financial Officer

Well, as something... I was adding another point, the RMX now that we launched in March which has any network products of 4 to 6 month sales cycle, we have had a full quarter of sale cycle now for Q2 and although we already got some nice benefit in the second quarter, we should continue to see some ramp in that in Q3.

Jason Ader - Thomas Weisel Partners

Can, just a last question now on RMX, could you give us a sense of how it's faring in the market, I mean what, I guess what contribution did you have in Q2 and what kind of contribution might you expect over the next couple of quarters in that product?

Michael R. Kourey - Senior Vice President, Finance and Administration, Chief Financial Officer

It was low millions in Q2. And again, with the 4-6months sale cycle, it got out there in March and we began to process it, the very first trickle was at the very tail end of March as you may recall, and we expect that to ramp by this quarter exactly carving out how much it contributes, we have forecasts but for competitive reasons we don't show the forecast of mix.

Jason Ader - Thomas Weisel Partners

You have a HD capabilities in that product, or you know the transcoding and the continuous presence like you talked about I think early Q3 is that we are on track for that?

Michael R. Kourey - Senior Vice President, Finance and Administration, Chief Financial Officer

Yes.

Robert C. Hagerty - Chairman, Chief Executive Officer and President

So, the other thing to think about Jason is we have a strong product line in the MGC. It was the first product in the industry to offer a high definition and we really have been first in high definition and so the RMX is gaining strength clearly so, and the MGCs are holding very well because they address different aspects of the market and I think... I actually... when you look at that portfolio, with the addition of the other solutions that we put together with our really strong and powerful firewall traversal product, the V2IU, which is de-pack inspection. It's the most secure way to go in terms of looking at firewall traversal, tied with our RSS which is recording and streaming and then of course the new product we just introduced, the multimedia server. That's... it's a really nice platform and selling that into enterprises, into government and into education, healthcare is really exciting. I think the team now has a much fuller approach. Its end-to-end high definition and I think it really adds something with our complete solution now.

Jason Ader - Thomas Weisel Partners

Okay. Thanks guys.

Robert C. Hagerty - Chairman, Chief Executive Officer and President

Thanks Jason.

Michael R. Kourey - Senior Vice President, Finance and Administration, Chief Financial Officer

Thank you Jason.

Operator

: Our next question comes from the line of Elliott Gould of Talisman [ph], please go ahead.

Unidentified Analyst

Thank you. Actually Jason, I think may have asked the question. I had queued up here, I want to make sure I got it, I was going to ask you for a swag on your... the percentage your group units win on HD or telepresence. Bob said something about 20% sequential growth in the quarter and then in the answer there to Jason you were talking about low millions?

Michael R. Kourey - Senior Vice President, Finance and Administration, Chief Financial Officer

That was only RMX side, Elliot

Unidentified Analyst

On the bridge?

Michael R. Kourey - Senior Vice President, Finance and Administration, Chief Financial Officer

Yes, on the RMX.

Unidentified Analyst

On the bridge, okay.

Michael R. Kourey - Senior Vice President, Finance and Administration, Chief Financial Officer

The new multimedia bridging platform, the HDX we did not give the number, we did give the growth rate. It was... I mean a nice growth over 20% sequential as per we talked about when we contributed over $10 million in revenues. So although for competitive reasons we don't give detailed break out until all the market date is out there that you work on, it was a nice step up from the well over $10 million last quarter, more than 20% sequential growth, in fact.

Unidentified Analyst

Alright

Michael R. Kourey - Senior Vice President, Finance and Administration, Chief Financial Officer

And then RPX, if would like me to answer that --

Unidentified Analyst

Sure

Michael R. Kourey - Senior Vice President, Finance and Administration, Chief Financial Officer

That has quite a sales cycle. We've gotten tremendous amount of interest and activity there that Bob touched on. But its still relatively low from revenue contribution standpoint and we would expect to start see that ramp in Q3 and Q4.

Unidentified Analyst

Okay, I appreciate that. Thank you very much.

Michael R. Kourey - Senior Vice President, Finance and Administration, Chief Financial Officer

Thanks Gary.

Operator

Next question comes from the line of Troy Jenson. Please go ahead

Troy Jensen - Piper Jaffray

Hey congrats on a nice quarter, gentlemen.

Michael R. Kourey - Senior Vice President, Finance and Administration, Chief Financial Officer

Thank you, Troy

Troy Jensen - Piper Jaffray

Hey, so a follow up on a couple of Jason's specifically on the SpectraLink side, Mike I don't think anyone ever knew what SpectraLink's revenues were in the first quarter. I think you gave the step results when you guys reported in for the March quarter, but could you provide us what was SpectraLink was for full quarter?

Michael R. Kourey - Senior Vice President, Finance and Administration, Chief Financial Officer

Well in Q1 that was the actual quarter close, we had a... and I am not sure that's ever been broken out officially, but it was a chunk lower than where we were this quarter. It was sub $30 million all in last quarter, in Q1 if you take our stub and their stub. So that's where it was in Q1.

Troy Jensen - Piper Jaffray

Okay perfect. And then if you guys introduced SpectraLink to much of the traditional voice channel yet?

Robert C. Hagerty - Chairman, Chief Executive Officer and President

No, that s really what's going on right now. So one of the just we want to call it distractions or activities well I probably would characterize is, was getting everybody trained. So you have a Polycom sales force and you have the SpectraLink sales force we have to cross train everyone who is going to be selling all the full product line and most are, get the regional assignments all made, get the customer assignments made. So a lot of that activity... that all of that activity is behind us now and that all happened in this last quarter.

Michael R. Kourey - Senior Vice President, Finance and Administration, Chief Financial Officer

Right and our overlap channels clearly continue to sell both product lines, but from the new and from any material contribution that will be Q3 from the cross-selling synergies on that side.

Robert C. Hagerty - Chairman, Chief Executive Officer and President

So it will be nice to instantaneously cut over but you do have to train the sales... we definitely train the sales force, the SE's, the channels and that was a big activity in second quarter.

Troy Jensen - Piper Jaffray

And then one line SpectraLink for Mike. Could you give us what the breakup was.., how much of the backlog would have been from SpectraLink this quarter?

Michael R. Kourey - Senior Vice President, Finance and Administration, Chief Financial Officer

We just... I mean we worked that out with a sequential step up, so that you can see how that works. We just don't break up the mixes of the various product lines and then it continued to be... I mean last quarter we told you it was around 8 and change. And I think 8.45 if I remember right and then this quarter, it's all blended into the voice business, it's still several million dollars obviously.

Troy Jensen - Piper Jaffray

Okay perfect. And then Bob, could you I know you guys had a opinion last year with Codian just this week, I think they announced a counter patent violation our new guys. I just would kind of like to get you guys a sense on kind of where we are at with that litigation and then Mike, I would be curious to know how much we spend on the quarterly or annual basis on this... legal fees for this?

Robert C. Hagerty - Chairman, Chief Executive Officer and President

So, that's an ongoing... it's an ongoing active lawsuit... really rather not comment on it and I think this was all together. This is all one suit and that was another move in this ongoing --

Michael R. Kourey - Senior Vice President, Finance and Administration, Chief Financial Officer

And that the lawsuit is completely separate and have a completely separate time line.

Robert C. Hagerty - Chairman, Chief Executive Officer and President

It's true.

Michael R. Kourey - Senior Vice President, Finance and Administration, Chief Financial Officer

And our trial, which that has nothing to do with, our trial is scheduled which is public record to be in October. So, we are three months already into the trial where we are in suit with Codian.

Troy Jensen - Piper Jaffray

And Mike, what about the legal fees?

Michael R. Kourey - Senior Vice President, Finance and Administration, Chief Financial Officer

We don't break out the legal fees.

Troy Jensen - Piper Jaffray

Okay. Alright, well congrats for the nice guidance.

Robert C. Hagerty - Chairman, Chief Executive Officer and President

Thank you

Michael R. Kourey - Senior Vice President, Finance and Administration, Chief Financial Officer

Alright, thank you, Troy

Operator

Our next question comes from the line of Sanjiv Wadhwani. Please go ahead.

Sanjiv Wadhwani - Stifel Nicolaus & Company

Thanks so much. Michael or Bob, from the script it seemed as if the telepresence product actually is getting some fair amount of momentum although the sales cycles are clearly long. I'm curious to see whether you are seeing a lot Cisco, I'm guessing you all are and how you are stacking up and how it is like competing with those guys in that product category?

Robert C. Hagerty - Chairman, Chief Executive Officer and President

So, I think we walk into a deal and we have got real... we've got creditability. We have got a company that comes with a portfolio, we have a company that comes with a service organization, it's worldwide deployed with the sales force, it's globally deployed. So, we can deliver globally. Our product, we believe is the most immersive in the industry. It's got high quality high definition video, it's got an immersive room, its a room within a room. So, we have a lot of competitive advantages that we are able to bring and we feel comfortable about our competitive position and again I think that looking at the pipeline for telepresence, looking at the sales cycle because, it requires a lot and it's a lot of money that people are investing and what we are seeing is deals that they get bigger because, it's not just telepresence we are able to go in and talk about RMX for example. Our ability to do multi-point on the telepresence product, our ability to bring in desktop video into the room, our ability to bring in another conference room to connect across the firewall with our V2IU, to archive and stream it and to edit and do all the other work you need to do on a multimedia piece of content. So, it's a... we are feeling very good about where we are. Obviously Cisco is an important partner of ours, we think that they are a strong partner. We continue to partner with them and compete in areas where we have some overlap. And entire pricing scenario, we have overlap and we are comfortable about our position. Do we see them? Yes, do we compete affectively, we believe so, and we feel good about our product and our solution from the breath of it, from the interoperability of it, from the quality of the video and the immersive approach we have taken as opposed to the rest of the industry.

Sanjiv Wadhwani - Stifel Nicolaus & Company

Got it. And then Mike, in terms of the guidance, should we expect the continued growth in the Network Systems product line just because this is sort of the first time we have seen it in a while?

Michael R. Kourey - Senior Vice President, Finance and Administration, Chief Financial Officer

Yes. No, we are very pleased with the turn around of growth. It was something that we had anticipated and with our visibility and it's occurred and yes, clearly we expect to see continued growth in the network systems area.

Robert C. Hagerty - Chairman, Chief Executive Officer and President

And in prior calls we talked about the transition of product line, Proxias represents a major step towards what we need to deliver to service providers who are getting ready for the change over from traditional TDM, its more of an IP-based solution and being IMS compliant is a critical move to make to accomplish what service providers really want to accomplish in their next generations service offerings and so we are really excited now, this platform now with RMX, with Proxias and all the other developments I talked about with the ancillary products and the solution orientation of it, really is a powerful solution and we are excited about this platform and our video endpoint platform and the work we've done with SpectraLink. It's a very nice new product line, we are fresh with technology and we are enjoying building our sales force at the same time.

Sanjiv Wadhwani - Stifel Nicolaus & Company

Got it. Thanks so much.

Michael R. Kourey - Senior Vice President, Finance and Administration, Chief Financial Officer

Thanks Sanjiv.

Operator

Our next question comes from the line of Bill Choi. Please go ahead.

William Choi - Kaufman Bros., L.P.

Okay. Thanks. I wanted to ask about HD executive desktop, this seems to be a key hit for your rival Tandberg. Can you just talk about where you are with that product and what you are doing to target this opportunity?

Robert C. Hagerty - Chairman, Chief Executive Officer and President

Sure we the have that product on our roadmap. It's been seen by some of our customers. I really don't want to go into details about a product that hasn't been announced, formally announced. It's been under NDA just shown to a number of people. I have seen both products. I am extraordinarily excited about that platform and I think that it's going be a really a great addition to Polycom's, a complete high definition solution. Now again, I'm not talking about any specific competitors, but most other competitors do not have a high definition version, they have a DVD quality version. Ours is a high... it's really a high definition, which is a big difference. And additionally, we have a fantastic offering in traditional video, so our V700 and our VSX 3000 continue to sell well, so it's a complete solution depending on which way you are working.

And one more point about our solution in high definition and I think this is somewhat lost on people. But it's... when you are using a high definition unit at lower speeds all the way down to 384, you're getting DVD quality, so this a scaleable solution that works better than anything out there in lower speeds, gives really great quality all the way down to low speeds and then of course scales all the way up to full high definition as you get up to over a megabit.

William Choi - Kaufman Bros., L.P.

What price range are you aiming for this because they are at 10 bugs was worth about 8000 on that product, so you --?

Robert C. Hagerty - Chairman, Chief Executive Officer and President

Well,we haven't announced pricing, but --.

Michael R. Kourey - Senior Vice President, Finance and Administration, Chief Financial Officer

First one I'd to say Bill it's kind of a stay tuned, we understand it's a very exciting opportunity and we absolutely plan on participating and just... if I heard some of the chatter about what we've got coming, I would just ask you that patiently just wait and see.

Robert C. Hagerty - Chairman, Chief Executive Officer and President

And I would say one more thing: HDX, RMX, Proxias, and the SpectraLink product line and the Polycom VoIP product lines are all platforms, and we iterate products out of those platforms, the strong platforms and nothing, anything away from our VSX product line which is a fantastic standard video platform and then we continue to add both software releases and looking at products in that area as well. So great platform, engineering themes, development themes, the product planning themes, should be proud, these are fantastic platforms, great products coming out of it but a lot more to come.

William Choi - Kaufman Bros., L.P.

Okay. And then on the conferencing solutions, generally your standard definition stuff was right around $5000 per unit just in the super map. What is the comp way of PUC on HD overall because we have such a wide breath of product right now including the very high end telepresence, if you could talk about AFTs?

Michael R. Kourey - Senior Vice President, Finance and Administration, Chief Financial Officer

Yes Sir. On AFT product there is an uplift vis-à-vis the standard definitions as you are referring to them and then of course in RPX it's quite a step-up because as you may note, the list prices go from $200,000 and change all the way up to $600,000 dollars depending on which configuration you're talking about and how large the immersive room. So there is a benefit, although we haven't seen a lot in the way of the RPX revenues, with the pipeline we'll begin to see that in the second half with what we have hard visibility on. Bill, with the HD, it's already a material contributor, and there is a step up in the ASPs. For competitive reasons we like not to break it out in detail.

William Choi - Kaufman Bros., L.P.

Okay, I was going with it. Just maybe in any convention... in terms of how it's holding up, I know you guys have had some recent promotions on the HD product, has that been turning up, down, will be flattish?

Michael R. Kourey - Senior Vice President, Finance and Administration, Chief Financial Officer

Well, we do have promotions. These are temporary promotions on the 9001 and 9002. These are not place changes. They are temporary promotions. And what we're seeing is the appetite for HD is great and we have... a lot of our revenues are up in the 9004 category quite frankly, where there is no such promotion. And over time it's predictable as we've done in all of our products, product categories, you will see a wide array of products of various configurations of the HD product line as you have in other product lines and so I would just say that's something else you will see coming over time, probably like to leave it at that.

Robert C. Hagerty - Chairman, Chief Executive Officer and President

Yes, I think we shouldn't go way too much into our roadmap and competitively, we know people monitor these costs quite diligently, so we are happy to do NDAs with people who are in the buying cycle and --

Michael R. Kourey - Senior Vice President, Finance and Administration, Chief Financial Officer

Not on the --

Robert C. Hagerty - Chairman, Chief Executive Officer and President

No, no, if you want to buy something, people felt like be a... but so customers, for those who are listening in on the call, we welcome you and we'll be happy to do NDAs on and show you our roadmap and where we were going depending on where you are as a customer. I did say customers and I'll repeat customers. It's customers who are getting NDAs at this stage.

William Choi - Kaufman Bros., L.P.

Okay. Finally Europe was down, maybe you could provide a little more color? Thanks

Robert C. Hagerty - Chairman, Chief Executive Officer and President

Europe is making some great strides. I'm really happy with the editions that are going into Europe and they had a little bit of tough quarter in couple of areas and part of its related to the distraction of getting the SpectrLink group completely integrated and they are ready to roll in the third quarter and second half. So pretty excited about the team in EMEA, the progress they are making and the additions they are putting into that team.

Michael R. Kourey - Senior Vice President, Finance and Administration, Chief Financial Officer

Right, we expect to see that turn around here in Q3.

Operator

Our next question comes from the line of Scott Sutherland. Please go ahead sir.

Scott Sutherland - Wedbush Morgan Securities Inc.

Good afternoon, Bob, Mike.

Michael R. Kourey - Senior Vice President, Finance and Administration, Chief Financial Officer

Hey Scott, how are you?

Scott Sutherland - Wedbush Morgan Securities Inc.

Good. I wanted to follow up on the last question on Europe, was weaker than some of the other venues like the Americas and Japan. And it sounds like especially in Europe, across the sales force across the company. So if there's anything else that was affecting Europe more than the other regions?

Robert C. Hagerty - Chairman, Chief Executive Officer and President

Oh remember Europe has --,

Scott Sutherland - Wedbush Morgan Securities Inc.

Europe is more populated?

Robert C. Hagerty - Chairman, Chief Executive Officer and President

I am sorry, Scott, but Europe has a big part of SpectraLink. We have our research and development site there, we have our large sales force there, and so there is a fair amount of work to had to go on and I think that that was a smaller team taking on a bigger chunk so, I am really comfortable with our EMEA team, the leadership there is strong. They've got their work behind them now and its time to get selling happening as a fulltime activity, not just training on the site and selling when you can sell, so I think we are in good shape going into Q3. Of course Q3 in Europe is a summer quarter, but I think that from what I have seen of their planning and from what I've seen of what we've accomplished so far, we are comfortable with where Europe is right now.

Scott Sutherland - Wedbush Morgan Securities Inc.

Okay. So looking again on the voice business and it's often distractions, can you kind of break down a little more these two moving piece on the traditional voice or how is the voice-over-IP going in, is that still there in the corner?

Robert C. Hagerty - Chairman, Chief Executive Officer and President

So we saw growth in the Voice-over IP is a very strong product line and we are continuing to see real strength in Voice-over-IP both on the conference side and the desktop side, yes, so that's continuing to move and I'm, and I'm really optimistic that as we move to cross-selling with the SpectraLink sales team becoming... selling a more unified solution as Polycom sales team selling more unified solution units and you can set to be more customer-focused. So you don't need two people calling on the same customer and so that reorganization of territory and customer accounts is really materially behind us, along with the cross training. So I think, we are looking forward to seeing some synergy out of bringing those two organizations together right now. So the VoIP is strong, I think there is lot of good pipeline on the wireline stuff and of course we've got one think to point on the traditional video, I'm sorry traditional voice on the TVM stuff, one of the things that's new in the product line now is that it's a cellphone immune. So I am not telling any of you've been involved where you're have the... I want to use new smartphones or GSM phones and you put it in your a... not just Polycom product but if using any phone, a TV monitor we've rebooked the filtering and the software in that phones. So new phones now are immune at some distance, so seeing the pretty down close, I've seen people put him on top of the phones and not have any of that clicking sound that you get. So we are really very happy about that and we think that's a real selling point for Polycom and that gives us another upgrade cycle obviously to go back and upgrade some of the older phones with these one better sounding phone, higher volume phones in terms of decibels and the fact that, we have now got a cellphone immunity.

Scott Sutherland - Wedbush Morgan Securities Inc.

Okay. And just I've a quick question on SpectraLink for Mike. First Mike, I know you kind of less seeing SpectrLink in backlog Can you give a rough feel worldwide in sort of revenue hoping that it's not the last call you gave it?

Michael R. Kourey - Senior Vice President, Finance and Administration, Chief Financial Officer

You know I don't have that break up that they were going to be doing here but, we had, we had great growth in the deferred revenue which is primarily maintenance contracts, which is not related to SpectraLink obviously, not obviously, but not as much so it is in the video and the network systems area and then also in the deferrals associated with acceptance of products. And so again, we did the detailed break up last quarter as we took them on and then from there we are going with the sequentials, which obviously as with last quarter include both.

Scott Sutherland - Wedbush Morgan Securities Inc.

Okay. And lastly, SpectrLink, you mentioned the last quarters you got $0.45 diluted, how do that pan out in Q2 and how do you expect that's going to spread at this point?

Michael R. Kourey - Senior Vice President, Finance and Administration, Chief Financial Officer

Well we looked at it, we've actually did very well here in the second quarter, with the quantity better then we anticipated, we had updated guidance last quarter to show that we are at... we toughed that dilutive effect about in half, and then if you look at where we are today we actually, we had forecasted we do 14.5% to 15% in operating margin, we ended up doing 15.9%. So thus far in both steps, we are tracking ahead of plan. So we were very encouraged by how fast this moving. Don't let the voice distraction obviously in Q2, well I am sure you quote that, but it's moving very fast and from the pure financial standpoint, we did better in the $35 million, we did the $36.4 million in Wi-LAN business and we are poised well for the second half. So this is running out of plan.

Robert C. Hagerty - Chairman, Chief Executive Officer and President

And on the COGS side it's the fourth quarter before we start to see the actually move to the Fareast with the manufacturing efforts and then obviously there after spike up the inventory. But that's yet to come.

Scott Sutherland - Wedbush Morgan Securities Inc.

Alright. Great, thanks a lot guys.

Michael R. Kourey - Senior Vice President, Finance and Administration, Chief Financial Officer

Thanks, Scott

Operator

Our next question comes from the line of Greg McArthur [ph] Please go ahead.

Unidentified Analyst

Hey Bob, Hi Mike

Michael R. Kourey - Senior Vice President, Finance and Administration, Chief Financial Officer

Hey Greg, how are you?

Unidentified Analyst

Good. I think it's about time that somebody said I think you guys are doing a magnificent job, I mean right now these numbers look very powerful. I think you are in a sweet spot, but let's reflect a bit 2 years ago. Two years ago within a day the stock was at 14, so you have been doing something, I would say exceptional.

Michael R. Kourey - Senior Vice President, Finance and Administration, Chief Financial Officer

Thanks a lot, I appreciate it.

Unidentified Analyst

I took my hat for both of you.

Michael R. Kourey - Senior Vice President, Finance and Administration, Chief Financial Officer

Thank you, thank you very much.

Unidentified Analyst

Just what I am interested in is the desktop that you mentioned Bob and not the high-end but the numbers obviously going five years old are pretty powerful. And if you show in challenge us banging the table on collaboration of the Second Wave etcetera, etcetera and then you throw in some of the tit-bits of Google take out a small company Maritech it seems to me you are right smack in the sweet spot. My question here is while I talk about the low-end desktop not the HD but do you see the opportunity that I see or is there any opportunity in, and how are you pursuing?

Robert C. Hagerty - Chairman, Chief Executive Officer and President

So clearly we have been a long time participant in desktop going back to our acquisition of PictureTel, they were very strong on the desktop. We were the first to really introduce a desktop enterprise class solution with the PVX. We continued to invest in that area. We have done some nice partnerships where our ecosystem can work with IBM solutions and Microsoft solutions. We have done that solution with some of our other partners like Avaya and we are look at, we constantly look for those solutions to be able to leverage that, as the market continues to heat up in that area. So, clearly a scenario of focus for the company. We continue to spend money in that area, we continue to monitor what's going on through out the industry and there is a lot of people doing a lot of different things and we are excited about it, we also believe... I think we also pound the table of our collaboration and that's certainly a key part of it. And we look at it both from a soft client, right, what you are on your PC and from a hard client and so expects more things through 2007 and 2008 and in that particular area, I really don't want to go any more depth to that because it's a competitive issue.

Unidentified Analyst

I understand. One of the movers just off the top you had to read on Cisco, WebEx and global market[ph]?

Robert C. Hagerty - Chairman, Chief Executive Officer and President

Well, you know I think that you know we have the best solution out there. I think that everybody is interested in what they can do and I can't speak to why either Google or Cisco moved in on the one of those particular deals, I can sure say that it just speaks well of the market. It sure indicate that's on you... we are in a hot market at early stages and people are tying to get position on it. I think that the Cisco solution was probably more about the content collaboration, they did have a solution that they have run I don't remember the name of it and this are... the WebEx obviously augments it and we see those moves as all positive and it brings attention and momentum in a place where we have strong portfolio.

Unidentified Analyst

Yes because usually the figures are right on and the numbers are pretty substantial working on in the space I'm talking about?

Robert C. Hagerty - Chairman, Chief Executive Officer and President

Sure.

Unidentified Analyst

I go entirely, you are right on a sweet spot and we are going to do it and we already proven it, so.

Robert C. Hagerty - Chairman, Chief Executive Officer and President

Well, thank you.

Unidentified Analyst

Good job and obviously operates on.

Robert C. Hagerty - Chairman, Chief Executive Officer and President

Appreciate it, thanks.

Operator

Our next question comes from the line of Tavis Mccourt. Please go ahead.

Tavis Mccourt - Morgan, Keegan & Company, Inc.

Hey guys, Tavis.

Robert C. Hagerty - Chairman, Chief Executive Officer and President

Hi Tavis.

Tavis Mccourt - Morgan, Keegan & Company, Inc.

I guess, Bob I wonder if you can kind of talk a little bit more about the line of desktop phones and I guess other phones you plan to launch with Microsoft this quarter? Are some of these others co-branded or they branded Microsoft and as we talk about the distribution of them that would be great as well.

Robert C. Hagerty - Chairman, Chief Executive Officer and President

Alright so obviously it's a relationship it's in evolution. There are four phones that we talked about on the call today. They are the speaker phone that works with the soft client. They are a wireless product that works over the... or through the PC. There are standalone desktop phone and an executive desktop phone. And they are branded... obviously, this is to work on Microsoft. So, we would welcome any branding and we expect to brand as much as we can with Microsoft and of course...

Tavis Mccourt - Morgan, Keegan & Company, Inc.

Have a new co-program.

Robert C. Hagerty - Chairman, Chief Executive Officer and President

Yes, and Polycom will be prominent. So if you were at the Polycom brand being near and it will be a pure OEM build, no, Polycom brand will be there prominently. We have more things we would like to work with them. It's a great ecosystem partner, it's a great opportunity. We are honored that Microsoft would think this highly of us to allow us into their launch. We are excited about what they are doing and we are excited that we can contribute and as you can see it's just the beginning because our VoIP portfolio, how strong and wide it is, our conference phone portfolio, how strong and wide it is. So it is lot's to be done here and I think this is just the beginning of a great relationship with Microsoft and we are happy to be and honored to be a part of that as we are with Avaya, and our relationship with Avaya, with Nortel, with Cisco and some of the other partners that are really close to us.

Tavis Mccourt - Morgan, Keegan & Company, Inc.

How familiar are you with at this point in terms of Microsoft's distribution strategy in that regard, does this open up a lot of traditional IP resellers that might be selling the OCS will now become more telephony resellers?

Robert C. Hagerty - Chairman, Chief Executive Officer and President

Yes, I think that's... certainly I think that everybody is going to feel their way on this. We have this some overlap in terms of the way we go to market through our distribution networks. But in terms of the direct war who be selling and implementing, yes, that's where I think we are going to get some net gain out of it.

Tavis Mccourt - Morgan, Keegan & Company, Inc.

Great. And then in terms of the next stage with SpectraLink acquisition obviously kind of some decent job on the integration of the back office and in the process of cross-selling now, one the things that you mentioned when you bought company is being is spin products, so a little more quickly than SpectraLink was able to do as a standalone company. When should we start expecting perhaps some new form factors of technologies out of that group?

Robert C. Hagerty - Chairman, Chief Executive Officer and President

Well, I think in terms of tying to market, we are already seeing some of the effects. I think, one thing I know is Sunil runs that group and does a fantastic job with our voice business. He is spending an enormous amount of time. They are as his rest of his team, both in the Denmark facility and in the Boulder facility, so there is a lot of... in the same front, our... a whole launch process is being integrated with their launch process and we have a new launch process that... I mean it's the best of the best kind of launch process and all groups are being trained in how to do that. It was geared around time to market best in class. And we used some... lots of information to be able to put that best in class process together. And I know that the teams are doing a great job there. There's a lot of cross pollination going on. Just in the fact that... think about the protocols that we already have with our VoIP product line. I will say easily transported that's like software is free. It's not easily transported, but it's certainly a lot faster to transport what you already have. So a lot of coding work that has to be done and any duplication of effort now is going to be minimized and we will be able to share engineering resources on projects. So we are really excited about it and I think to start the see it already. But I think, materially you will see it in the revenues and the new products that start coming out. You do have a tooling cycle and a couple of other things to go... to go through, but I am expecting in early '08 through '08 and then on start to see the benefits of that.

Tavis Mccourt - Morgan, Keegan & Company, Inc.

Thanks. Thanks a lot.

Robert C. Hagerty - Chairman, Chief Executive Officer and President

Thank you, Tavis.

Operator

The next question comes from the line of John Anthony. Please go ahead.

John Anthony - Cowen and Company

Good afternoon guys. A few quick ones, I apologize if you have covered any of this. Have you talked about yet where they are, where SpectraLink is on the 8,000 upgrade and how many customers from the installed base are in the process of doing that?

Robert C. Hagerty - Chairman, Chief Executive Officer and President

No, we didn't. Do you want to talk about that? I mean, I haven't gone into that level of detail on the call. And so that's a product line, it is out, there are customers making the transitions, I think it's an orderly transition and it's an exciting new platform. But I don't want to get into too much detail again competitive. There are competitors in this space and we haven't really gone into that detail on the earnings call.

John Anthony - Cowen and Company

Can you also just let us know where you guys are on the SIP integration, whether that has been completed yet natively?

Robert C. Hagerty - Chairman, Chief Executive Officer and President

I don't ... on the Wi-LAN?

John Anthony - Cowen and Company

Yes.

Robert C. Hagerty - Chairman, Chief Executive Officer and President

Yes, so I'm not sure we... I don't think I could say today we've got the Polycom SIP... complete Polycom SIP protocol stack ported over there. I think that's something that's yet to come in the second half.

John Anthony - Cowen and Company

But you think it will be before the year end?

Robert C. Hagerty - Chairman, Chief Executive Officer and President

I hope so. I mean, I think that's certainly in the cards, absolutely.

John Anthony - Cowen and Company

Okay.

Robert C. Hagerty - Chairman, Chief Executive Officer and President

And as you start to cross-sell, one of the promises of cross-selling, there are some things that have been done. I don't know where we are in complete integration, but I know we have some common customer now that are... we've integrated that some of the SIP platform in.

John Anthony - Cowen and Company

And can you give us a sense, I know you said RMX is in the low millions, would network have grown without contribution from RMX?

Michael R. Kourey - Senior Vice President, Finance and Administration, Chief Financial Officer

I guess not, right? I mean, if you were to back it out, then I think year-over-year, no, it would not have.

Robert C. Hagerty - Chairman, Chief Executive Officer and President

There was a primary effect and a secondary effect. First off, primary effect is that you sold the product and the revenue adds incrementally to the business. Secondary effect is it gets you into deal, gets you into door, so you get a chance to talk about it. In some cases, we've had incremental sales on the MGC. And the other thing to remember is they work in concert. So you can blend the package with some MGCs and some RMX and so, I know there is some of that going on too. So, I think as the product line goes forward, it's going to be less clear about which you get which, was it because we have MGC we got the RMX, or because we have the RMX we got the MGC. So, clearly though it was a good quarter and a good beginning for RMX.

John Anthony - Cowen and Company

Okay. And then lastly on the service provider revenues, they have kind of been hovering around the same percent for the last several quarters. What do you... what's it going to take before we see any sort of acceleration there? Is that a functional of product, is it a function of change in channel strategy, is that something that you expect to be orderly or is there a chance that we might see some sort of step function at some point?

Michael R. Kourey - Senior Vice President, Finance and Administration, Chief Financial Officer

Well, I mean, one thing to keep mind, of course we had a big step up in revenues this quarter, right, with incorporating SpectraLink. So, I mean, that masks some of the moving parts there with it holding constant, quite frankly. Secondly, we have things like the Proxias platform that is... will be heavily biased if not exclusively towards service provider, which is very useful on the voice bridging side, notably the unified bridging side. So, I don't know orderly, it probably... I mean, I think that you would expect to see it start to increase as a percent of revenue, but it also frankly depends on the successes we are having with some of these growing partnerships with folks like Nortel and Microsoft and Avaya, frankly, that is growing to be an ever increasing partnership. So, it's always a tough call. I mean, as I said here internally, it would be difficult to say exactly how those percentages play.

John Anthony - Cowen and Company

Okay, great. Thanks guys

Michael R. Kourey - Senior Vice President, Finance and Administration, Chief Financial Officer

Thank you.

Operator

Our next question comes from line of David Carson. Please go ahead.

Unidentified Analyst

Mike and Bob, congratulations on the quarter.

Robert C. Hagerty - Chairman, Chief Executive Officer and President

Thank you Dave.

Unidentified Analyst

Good job on the DSOs.

Michael R. Kourey - Senior Vice President, Finance and Administration, Chief Financial Officer

Thank you.

Unidentified Analyst

A couple of quick questions, LifeSize, you talked about the other competitors. Are you seeing anything there and they have talked in the past about trying to broadening their product line and they are kind of at the low-end. Does that come out with any new products, do you seen any sort of pricing pressure from them or --?

Robert C. Hagerty - Chairman, Chief Executive Officer and President

Not really. I think that they are in the marketplace and I don't know exactly where they are, they haven't announced numbers for this... for the last quarter, for Q2 yet. Certainly, we are cognizant of all competitors out there. We have... again, we have seen them in deals. We clearly see Tandberg more than we see LifeSize and we see Aethra more than we see LifeSize, but we... it's a good competitive area, it's a great market. We are... it's big enough for a lot of competitors in the space, but it's an intense competition and we feel very good about our platform and how it stands up against these competitors. But it's a large market and we can compete... well, so if your question is can you compete effectively against LifeSize, my answer is yes. And do we see them on occasion, but we clearly see Tandberg and Aethra, Sony more than we see LifeSize at least at this stage, but we are keeping an eye on.

Unidentified Analyst

And then on Tandberg, you talked a little about Europe and SpectraLink being a little weak there. Was that part of the reason why Tandberg did so well this quarter or I mean, you both had good growth, but they did... seem like they maybe gained a little bit of market share, any thoughts there?

Robert C. Hagerty - Chairman, Chief Executive Officer and President

I guess you have to see on the market share, I guess if you add the numbers up now, it looks like they picked up a little bit. Again this thing see saws, they are a strong company, we are strong company, it's see saws based on who is getting to the customers, but I don't know, Mike.

Michael R. Kourey - Senior Vice President, Finance and Administration, Chief Financial Officer

Hey, the net of it is obviously we are the leader here. It's early-stage penetration. I mean, we are talking mid single-digits at best as far as room video penetration, telepresence is literally just starting, which is a very exciting opportunity as well. So, with our leadership position we are excited about the opportunity. Probably shouldn't spend a lot of time talking about competition. It'd be best to ask the competitors with those questions. But as the leader, we plan to continue to lead, have the leading innovations, the best HD solution, the telepresence solution and that's what we are going to do. And as Bob said in his comments, it's the most exciting period we have had in this industry and it stands to have a few years of excitement and that's our focus servicing the customers.

Unidentified Analyst

Okay. Thank you very much.

Robert C. Hagerty - Chairman, Chief Executive Officer and President

Thank you David.

Operator

Gentleman, at this time there no further questions. I will turn the call back to you.

Robert C. Hagerty - Chairman, Chief Executive Officer and President

Well, thank you very much for following Polycom during this exciting period in our industry. We appreciate your involvement at this point when unified collaboration is becoming a top initiative for IT and management worldwide. We will see you next time. Thanks very much.

Michael R. Kourey - Senior Vice President, Finance and Administration, Chief Financial Officer

Bye bye everybody.

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Source: Polycom Q2 2007 Earnings Call Transcript
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