Polycom, Inc. Q1 2008 Earnings Call Transcript

Apr.17.08 | About: Polycom, Inc. (PLCM)

Polycom, Inc. (NASDAQ:PLCM)

Q1 2008 Earnings Call

April 16, 2008 5:00 pm ET

Executives

Bob Hagerty – Chairman. Chief Executive Officer

Mike Kourey – Chief Financial Officer

Analysts

Jess – Bank of America Securities

Bill Choi – Jefferies & Co.

Jason Ader – Thomas Weisel Partners

Elliot Gold - TeleSpan Publishing

Manuel Recarey – Kaufman Bros.

Greg McCorsen

Scott Coleman – Morgan Stanley

M. – Tiger Veta

Tavis McCourt – Morgan, Keegan & Company Inc.

Operator

(Operator Instructions)

Mike Kourey

Good afternoon, everyone, and welcome to Polycom’s first quarter earning call. I am Mike Kourey, Polycom’s Chief Financial Officer, and here with me is Bob Hagerty, Chairman and CEO. As with previous calls, we are again augmenting today’s voice conference call with a webcast.

If you would like to receive the webcast, please open your web browser at this time and enter Polycom’s home page, which is polycom.com and click on Q1 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 market 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 in replay.

Most of you participating in this call are aware of the of the Federal Legislation regarding forward looking statements. Accordingly, we would like you to note that during the course of this conference call, Bob and I will be making forward looking statements and present forward looking visual materials regarding 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 risk and uncertainties and the natural events or results could differ materially. We discussed a number of these risks in our business in detail in the company’s SEC reports including most recently the companies form 10-K for the year ended at December 31st, 2007 and any forward looking statements must be considered in the context of such risks and uncertainties. Please note that Polycom’s application of U.S. generally accepted accounting principles or U.S. GAAP requires disclosure that availability of new products, plan features and upgrades discussed during this call are subject to change or cancellation.

At this time, let me turn the call back over to Bob Hagerty, Chairman and CEO.

Bob Hagerty

Thank you, Mike. To begin, I’d like to provide our first quarter financial highlights. Later in the call, Mike will go through the operating results in greater detail. Revenues for the first quarter were $258.9 million dollars, representing a 2% sequential decrease from the fourth quarter and a 34% growth rate year-over-year. Excluding SpectraLink, organic revenues grew 15% year-over-year. In addition, Polycom executed Q1 with a record backlog of $58.7 million dollars, up 2% sequentially and 23% year-over-year. Polycom’s deferred revenues also grew to a record $106.9 million dollars in Q1, increasing 23% sequentially and 49% over the year ago period. Excluding Cody and deferred license revenue of $14 million dollars, Polycom deferred revenues grew 7% sequentially and 30% year-over-year. For the quarter, non-GAAP earnings were .36 cents per diluted share, representing a 20% growth in EPS year-over-year.

Next, I’d like to discuss three critical drivers that we believe exists for the adoption of Polycom’s unified collaborative solutions that are having a positive impact on us today and will continue to benefit our company over the long-term. First and foremost, travel costs have increased dramatically, both long distance air travel and cross-town traffic. In addition, our traveling conveniences are also mounting, causing unexpected travel delays. With this in mind, organizations are increasingly seeking ways to reduce travel costs. Our unified collaborative solutions addressed this trend head-on. Pure out-of-pocket savings that our customers can gain from our solutions drive ROY often within the quarter of purchase. Just as important, spending only two hours for a two-hour meeting rather than one or two days is a key benefit for our customers by reducing opportunity cost and improving productivity. Our unified collaboration solutions are addressing our customer’s bottom line goals of cutting costs and increasing profits.

Second, in key international markets such as Europe and Canada governments and the public at large are demanding use of green technologies in order to reduce the carbon footprint of companies and public sector organizations. We believe that an increasing number of these groups are adopting our solutions as an effective method of complying with these mandates and meeting internal green initiatives.

Third, globalization of the enterprise is a paradigm shift in business affecting the work model in the industrialized world and emerging markets alike. Companies are utilizing the benefits of a global workforce and design, supply chain and go-to-market strategies. With our unified collaborative solutions, customers gained the full benefit of their in-office and mobile staff on demand and for many location. To fully capitalize on the opportunities presented by these critical drivers, we continue to execute on our go-to-market strategy built on three primary areas of focus.

First, increasing our sales coverage right to the end user level. Second, broadening and deepening extensive strategic partnerships. And third, leveraging high impact marketing initiatives and along these lines, let me first speak about sales coverage and the cornerstone of our customer-centric strategy.

In 2007, we added nearly 250 sales people and have continued to add in the first quarter. In fact, we’ve grown our sales force by over 75% in the last 15 months. With this forward investment, we created the ability to sell our mission critical collaboration solutions both to the CIO and to the operating managers inside of organizations worldwide. Clearly we’ve made this forward investment to capitalize on the unprecedented opportunity in the collaboration market.

In Europe, for instance, where we began the sales expansion, we’ve already begun to experience the benefit of increased customer coverage through new customer wins and even closer relationships with our existing customers. Another core element of our go-to-market strategies, deepening and broadening relationships with our strategic partners. For instance, in Q1, we announced the expansion of our relationship with Microsoft from our recent voiceover IP alliance to extend Polycom’s industry-leading HD voice, video, telepresence offerings. This integration with Microsoft’s office communication server 2007 supports the movement of customers from traditional video conferencing to tightly integrated visual communications that are easier to use and manage and delivers a better overall user experience.

Also, during the quarter, we announced a healthcare solution with Nortel, whereby Polycom’s unified collaboration solution is tightly integrated with Nortel’s infrastructure. As Charles Solameh, VP of Nortel’s network business solution stated and I’m quoting here. “No one else offers such a complete and open telepresence solution, including technology and services, to address the real world challenges of today’s healthcare environment.” These announcements are just a few examples of how we are further penetrating our extensive network of strategic partners. In fact, we’re working closely with Avia, IBM, and others to deliver highly integrated and differentiated solutions to our growing customer base.

The last area of focus for our go-to-market strategy is leveraging high impact marketing initiatives. Over the past few quarters, we’ve made significant strides in building a world-class marketing platform to launch full integrated campaigns that span E-marketing, PR, trade, and media events, as well as C-level relationship management. We’re beginning our first major initiative last quarter with the stop-the-buzz campaign. This particular campaign is directed to customers of our sound station conference phones, highlighting that our recent innovation that eliminates interference from blackberries and other telephony radio emissions. This innovation creates a huge customer benefit for a small investment and with this high impact marketing campaign, we have the opportunity to capture customer upgrades and deeper product penetration.

Also, just yesterday, we launched our first integrated marketing campaign for our flag ship RPX and TPX immersive telepresence product line. In fact, over the next several weeks, we will be directing marketing investments across a wide span of media and event outlets for our telepresence solutions, which have emerged as the fastest growing product line of Polycom today.

Looking ahead, you’ll see significant marketing focus over the coming weeks and months that focuses on our green initiative, whereby we are leveraging our emerging status as a thought leader in the area of green technology. For Polycom, green technology is not only good for the environment, but a driver for our business.

Our leadership position in the market is predicated in part on our ability to continue to meet the growing demands of our customers. Our recent product announcements serve as a testament to our ability to generate innovative products and solutions that offer compelling value proposition to our customers.

In video, we’re continuing to experience the rapid growth of our HD and telepresence product lines. In this area, we began shipping the HDX 7000 in Q1. Extending our best in industry HD video collaboration product line down to an $8,000 dollar price point, and of course, up to the $29,000 dollar price point of a fully loaded flag ship HDX 9000 family of products. We also broadened our telepresence solution with the introduction of the TPX product line, enabling organizations of all sizes to benefit from Polycom’s offering, the most immersive experience in telepresence. Now, with our four to 28 person, fully integrated collaboration solution, sites of all sizes can be accommodated with the technology invisible to the end user.

In the voice arena, we just launched the sound station IP 6000 and 7000. These are Polycom’s newest IP conference phones that have high definition voice, emissions immunity, and they corporate a brand new industrial design. This is the most significant upgrade to our sound station platform in several years and we believe it will generate significant upgrade opportunities as customers seek out the latest technology. In addition, please keep in mind that 85% of the meetings rooms are still using a simple handset for group conference calls. For about $1,000 dollars, customers can get HD voice with plug-in-play IP connectivity. In wireless voice, we are launching our new SpectraLink 8002 Y5 phone, targeted at small and medium sized businesses. This provides a small and medium business market with a wireless LAN, telephony solution, that’s enterprise gray, and extends Polycom’s wireless solution to an even broader market opportunity. These product innovations are only a few examples of Polycom’s innovative leadership and unified voice, video, and web collaborations.

Our product objective is to provide the best collaboration experience for our customers, whether they’re in a telepresence room, a meeting room, at their desk, or while mobile.

Before I turn the call back to Mike, I’d like to touch briefly on the macro environment. In Q1, we did experience some lengthening sales cycles in the U.S., but we exited the quarter with a solid sales pipeline and much of the U.S. business that slipped into Q2 is already beginning to close. North America performed at near seasonal levels in the first quarter and the international markets exhibited strong year-over-year growth. We believe that the market demand for collaboration solutions, driven by ROY, green initiatives, and globalization of the work force will continue to drive adoption of our solutions. We believe executing on our go-to-market strategy, including expanding our sales coverage, deepening our strategic partnerships and leveraging our high impact marketing initiatives, coupled with our recent product innovations will drive continued growth through Polycom throughout 2008 and beyond.

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

Mike Kourey

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 is subject to many risks and uncertainties.

Moving to look at our results, as Bob stated earlier, revenues for the first quarter were $258.9 million dollars. This represents a sequential revenue decrease of 2% and a growth rate of 34% over Q1 of last year. Excluding SpectraLink revenues of $39.4 million dollars, organic revenues grew 15% year-over-year. On a product line basis, which includes the service elements of each product line, revenues for video solutions were $159.5 million dollars in Q1, down sequentially by 3% and up 17% year-over-year.

Video Solutions is comprised of our video communications and network systems product lines. Of these product lines, video communications generated $130.3 million in revenues, up sequentially by 1% and up 21% year-over-year. On a unit basis, we shipped 19,618 group video units comprised primarily of our world leading HDX and DSX product lines. On the desktop video front, we shipped 10,713 units in the first quarter.

The Network Systems product line generated $29.2 million dollars in revenues, down 18% sequentially and up 2% year-over-year.

The Voice Communications Business generated record revenues at $99.4 million dollars representing a 1% sequential increase from Q4 and a 77% increase over the year ago period. SpectraLink grew 6% sequentially and 41% year-over-year, including their pro forma full quarter of revenues in the first quarter of 2007. Excluding SpectraLink revenues, the voice revenue growth rate was 11% year-over-year.

Linearity in Q1 was off seasonally with 49% of revenues in the last month of the quarter. That being said, Polycom exited Q1 with a record of $58.7 million dollars in backlog, up 2% sequentially and up 23% year-over-year. Polycom’s deferred revenues also grew to a record $106.9 million in Q1, increasing 23% sequentially and 49 % over the year ago period. Excluding Cody license revenue of $14 million dollars, which is being advertised over ten years, Polycom’s deferred revenues grew 7% sequentially and 30% year-over-year.

Moving to revenue by geography in the first quarter, North America revenues were down 2% sequentially but grew 33% over the year ago period. Amia Europe grew 6% sequentially and 46% over the year ago period. Asia revenues were down 9% sequentially, but grew 26% year-over-year. Latin America was down 10% sequentially but up 19% year-over-year. Excluding SpectraLink revenues, North America grew 5% over the year ago period and Amia grew 29% over the year ago period. Asia and Latin America go not as yet have material revenues from the SpectraLink product lines.

From the channel standpoint, the revenue breakout for the first quarter is as follows: 39% to value added resellers, 51% through distributors, 5% through service providers and 5% direct. Looking at the revenue drivers for Q1, we’ve experienced some lengthening of the sales cycle in the U.S. market, as Bob referenced. Although the pipeline remains robust, a macro economic backdrop here impacted our U.S.-based revenue results; however, sales outside of the U.S. grew sharply from the year ago levels. From a product line standpoint, our HDX video platform wins continued. With revenues of HDX going 20% sequentially in Q1. Our flag ship RPX telepresence offering grew a remarkable 58% sequentially in the first quarter.

Network Systems declined from Q407; however, our new RMX multi media bridging platform grew both sequentially and year-over-year in the first quarter.

In the voice arena, our wireless of SpectraLink revenues grew sharply, both sequentially and year-over-year.

Looking forward into the second quarter, we expect a benefit from several factors. First we expect to experience the continued ramp of our recent hires in sales, especially in the international theaters of operation. Second, the momentum we’ve been seeing in HD and telepresence is leading to a growing pipeline and should drive further revenue gains globally.

Third, we expect growth from our strategic partnerships, particularly when leveraged by our increased sales coverage.

Fourth, much of the U.S. business has slipped into Q2 is already beginning to close, staging us for an improved performance in the U.S. this quarter.

Fifth, Q2 is a seasonally stronger quarter. Of course, we’ve also considered and accounted for the U.S. economic downturn in our thinking and guidance. With all of these factors in mind, we expect Q2 revenues to increase by 2 to 3% from first quarter levels.

Moving on to the statement of operations, non-GAAP growth margins for the first quarter was 60.3%. Breaking outgrowth margins by product family, our Network Systems product line continues to have targeted gross margins in the high 60’s range. Voice and video communications products have gross margins targeted in the high 50’s to mid 60’s range while desktop voice and service growth margins are targeted in the low 40’s range.

For the first quarter, service operated above their target range. Network Systems, video and group voice operated within their target ranges and desktop voice operated slightly below its target range.

Gross margins in the future may be higher or lower and are subject to mixed variations and other factors.

Switching gears to non-GAAP operating expenses for the first quarter, Polycom’s operating expenses increased sequentially in absolute dollars and on a percent of revenue basis in Q1. Looking at the specific non-GAAP operating expense line items for the first quarter, sales and marketing represented 27.3% of revenues for the period, up from 24.5% in Q4. R&D closed at 12.4% of revenues, flat with Q4 and G&A was 4.9% of revenues, down from 5.1% in Q4. In total, Q1 non-GAAP operating expenses represented 44.6% of net revenues in the first quarter, up as a percent of revenues from 42% in the fourth quarter.

Moving to a look at the company’s operating income, Polycom generated first quarter non-GAAP operating income of $40.6 million or 15.7% of net revenues. This represents a 26% growth in operating income from $32.1 million dollars in non-GAAP operating income in Q1 of 2007.

As a recap of our performance against our previously stated long-term target model, we are within our target gross margin range of 59 to 63%. Sales and marketing operated 1.3% percentage points over its target range and R&D operated.4 percentage points over our target range with G&A operating 0.1% percentage points below its target range. One note I would like to make about our target model is that based on increase scale, operating above the one billion dollar revenue run rate, we are updating our target G&A spending to 4.5 to 5.5% of revenues, an improvement of half a point in the rank. We are, of course, maintaining our long-term target model of 29 to 22% operating margin.

Q1 non-GAAP net income was $32.7 million dollars. This represents a 14.5% growth from $28.6 million dollars in non-GAAP net income in the comparable period last year. Non-GAAP diluted EPS in Q1 of .36 cents grew by 20% from .30 cents per diluted share in Q1 of 2007. GAAP profitability for the quarter was $14.2 million or .16 cents per diluted share in Q1 of 2008 versus $10.2 million dollars or .11 cents per diluted share in the comparable period last year. This represents 39% increase in GAAP net income and a 45% increase in GAAP EPS.

Looking forward to the second quarter, we expect gross margins to decline by approximately one percentage point, due to product mix and build levels. We expect Q2 operating expenses at approximately Q1 levels on a dollar basis, but to decrease slightly on a percent of revenue basis. As such, we anticipate operating margins to increase slightly from Q1.

Moving to tax guidance, we expect our effective tax rate to continue to be at 27%. Of course, this 27% rate is subject to change based upon changes in geographic mix, as well as changes resulting from any new U.S. or international regulations or interpretations.

Other income for the first quarter was $4.2 million dollars, including a $1.3 million dollar foreign exchange change. Looking into Q2, we expect other income of approximately $2 to $2.5 million dollars, driven by the lower cash balances associated with our Q1 stock repurchases, a lower interest rate environment, and no expectation regarding a further foreign exchange gain.

Moving to cash, in Q1, Polycom generated $36.3 million dollars in positive operating cash flow, representing Polycom’s 41st consecutive quarter of positive operating cash flow. The solid operating cash results were driven largely by our strong profitability and the payment we received associated with the Cody and deferred license revenue. Cash investments at the end of the first quarter totaled $351.8 million dollars.

Moving to DSO, the company’s net trade receivables of $140.7 million dollars, resulted in a DSO of 49 days of one day sequentially in year-over-year, driven primarily by the shift in the geographic mix. Looking forward, we are continuing our best in class DSO guidance of 40 to 50 days.

Inventory turns at the end of the first quarter decreased to 4.3 turns, driven by build levels, mix changes, and Q1 linearity.. Over the next few quarters, we expect to see gradual improvement in inventory turns toward guidance in 6 to 7 turns.

Regarding expected share count, we expect Polycom’s waited average shares for diluted EPS to grow by approximately 500,000 shares in Q2, exclusive of stock repurchases. During the first quarter, we purchased $60 million worth of our common stock. Note that we have an authorization to purchase approximately an additional $80 million of our common stock against the current $250 million dollar share buy-back authorization that we have. We plan to be active in this program in Q2 as we continue to bring value back to our share holders. In addition, the future potential buy-back from our stock, our share count will change based upon Polycom’s stock price, any acquisition activity, and other factors.

Moving to headcount, Polycom had 2,520 employees at the end of Q1, representing a net increase of 42 employees over the prior quarter. This is primarily driven by additions in sales.

As a final note on the financials, we have presented both non-GAAP and GAAP financial measures here today. Please refer to our reconciliation of non-GAAP to GAAP financial measures and the tables entitled GAAP to non-GAAP reconciliation in today’s earnings release.

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

Bob Hagerty

Thanks, Mike. In summary, unified collaboration continues to be a key priority for our customers worldwide. We believe the fast return on investment of our solution, compliance with green initiatives in Europe and other important markets, and the globalization of the workforce are driving adoption within enterprise and public sector customers alike.

In addition, we are pleased to report that the first quarter revenues for our SpectraLink wireless products grew sharply from the fourth quarter validating both customer demand for voice mobility solutions and the successful completion of the integration of this strategically important acquisition.

Looking forward, we expect growing contributions from our strategic partnerships, such as Microsoft, Nortel, Avia, IBM, and others as we deliver our highly differentiated video and voice collaboration solutions. Coupled with these partnerships, our new offerings in telepresence, HD video, and voiceover IP products differential Polycom and illustrate the exceptional value proposition of our innovations and what they’re delivering to our customers. With these products and partnerships, we believe Polycom is best positioned to capture customer demand being driven by the rapidly growing travel cost, globalization and environmental concerns. Further, through the sales investments we’ve made in 2007 and in Q1, we have increased our coverage in both existing and emerging markets. This is enabling Polycom to drive close customer relationships that deliver near term business opportunity and long-term annuities through product adoption and service opportunities.

On that note, we’d like to open the floor to financial and market analysts for any questions you might have. For all others, we invite you to stay on the call to listen in. Of course, as we discussed earlier in the call, many of the statements we have made and will made during the Q & A period are forward-looking statements which are subject to many risks and uncertainties.

Is the conference operator available at this time?

Operator

(Operator Instructions). Our first question comes from the line of Jeff from Bank of America Securities. Please proceed with your question.

Question-and-Answer Session

Jess - Bank of America Securities

Good afternoon, guys. First question, can you talk a little bit more about the macro impact on a different product segment, particularly the Network Systems side, which seems to fall off a fair amount during the quarter.

Bob Hagerty

Well, it’s certainly Network Systems products are more expensive, along with the telepresence and we had a very good fourth quarter with our Network Systems, but I will say that even within that product line, the audio product, which is sold primarily to service providers, was particularly weak in the first quarter. Now, in the past, we’ve talked about that that it’s a lumpy environment. We’ll get huge orders and then we’ll get nothing or near nothing and this is one of those off quarters for us with that product line, although demand seems reasonable and I think that there’s plenty of things in the pipeline for it, it just was not a quarter in which we were able to close a lot of business in the A&G business.

Jess - Bank of America Securities

We read the gross margin commentary and gross margins being down a percentage point next quarter to suggest that Network Systems will be weak again in the June quarter?

Mike Kourey

No, Jess, no I would say that the main thing you should glean from that is some expectations around some mix with things like handset phones, but also the desire here is to bring down inventory, not in the field, the field inventory is fine. I’m talking about here on our balance sheet. Because of some of the flippages, we ended up with more inventory than we’d like to have and so there’ll be some build adjustments to accommodate that in Q2. So there’s absorption related drivers there.

Jess - Bank of America Securities

And then on the SpectraLink business, can you quantify how much the business has slipped out of last quarter, closed this quarter, and what kind of growth we can expect from SpectraLink on a go-forward basis?

Mike Kourey

Well, the market for the wireless Y5 product line is pretty good. We expect to be operating at or above those kind of market rates. I wouldn’t say I would characterize Q1 or Q4 slippage. There was some slippage, but again in the U.S., where that product line is the strongest, we did experience some lengthening sales cycles. So I don’t know on a net-net basis whether we gained more from Q4 slippage into Q1 or we lost a little bit, because Q1 slippage into Q2, but I think the product line has strengthened significantly. Our integration, you know, we said in the fourth quarter it was maturely complete. I feel comfortable that during the first quarter, we solidified that. We are complete and we’re down to the business of identifying customers, building the value proposition, getting in the pipeline, and closing business. So I think we’re in a more normal operating environment. We are, certainly in Q2 and Q3, we were in…absorb the organization and try to understand what the key drivers were. In the fourth quarter, we started to capitalize on it. In the first quarter, I think we’ve delivered on it and we expect to continue to deliver on that.

Jess - Bank of America Securities

And then finally on the cost side, you invested pretty heavily in selling and marketing. The guidance is….flat sequentially. Do you think we’ve reached the headcount level in the sales department, where we should expect that as a percentage of sales to tail off a fair amount going forward?

Mike Kourey

No, I think we’re going to see, depends on demand and I think if you, you know, we don’t have a lot of people in the analyst community, the market analysis community, where they’ve updated based on the U.S. economy. I think that’s still a little bit influx. If, for example, we come through that and the U.S. comes on, with reasonable growth rate through 2008, then I would expect to continue to invest. Certainly, we need to continue to invest in the far east where there’s continuing demand and in Europe where demand has not tailed off at all.

Jess - Bank of America Securities

But on a percent of revenues basis.

Mike Kourey

No, you’re probably in a reasonable good shape on a percentage basis. I mean just an aggregate number, are we going to be continuing to add? I would expect to continue to add headcount. Now on a percent of revenue basis, we need to build up in order to get this thing boot strapped and I think we’re through the boot strapping phase. We’re into the managing the growth phase.

Jess - Bank of America Securities

So that should come down toward your range over the course of the year?

Mike Kourey

Yes.

Operator

Your next question comes from the line of Bill Choi with Jefferies. Please proceed.

Bill Choi – Jefferies & Co.

Okay, thanks. First a question on the movie support. Can you help us how we should be thinking with this business sequentially. Obviously, there’s some part, you know, SpectraLink had some sales that were in the backlog at the end of Q4. You mentioned that a little bit. Then, you know, you also have conference room phones, which typically don’t handle recession well. But then you also mentioned gross margins could be down because of mix and that’s largely more on the…so just first help us think about what we’re looking for sequentially and invoice. Thanks.

Mike Kourey

Yeah, we actually expect some good things out of voice. We do have relationships with Microsoft. We have very early stage relationship with three com as well as we have this campaign, the stop-the-buzz, which is associated with a new innovation that is out there in our conference phones today where for literally a few hundred dollars depending on the model, maybe a thousand for a high end model. You can swap your sound station with one that doesn’t get that huffing interference that so many products get from these newer technologies. So there’s real drivers that we’re pretty excited about and, frankly, with wireless, we are very excited about it. Yeah, there was a little spill over from Q4. That’s true, but there was also some nice underlying growth as well. Looking forward to Q2, we’re quite enthusiastic. That being said, we do not break out our guidance by product line explicitly, but we believe we’ve got some good drivers that would be good for voice, even though the cost benefits that Bob talked about on the call, by definition would lead you to think more about video. There’s some other reasons like what I just outlined that would drive the voice business as well.

Bill Choi – Jefferies & Co.

On the gross margin then, is that mix within the voice that’s impacting it or just again between the video versus voice?

Mike Kourey

It would be voice within the voice, with handsets, and again, it’s always hard to say exactly how it will be played out. If new product technology and the campaign is quite successful, that might not occur. Well, we’ll see, but we certainly want to plan for it. We need to adjust the build levels so we can bring down our unbalanced sheet inventory, because it went up in Q1 and we want to reverse that in Q2 and that’s going to bring down absorption.

Bill Choi – Jefferies & Co.

Is HD business coming largely from existing customers upgrading from the older products they had installed or largely driving new customer additions.

Bob Hagerty

I think we’re getting both. Certainly we are seeing existing customers who are interested in upgrading their platform. This product is a phenomenal solution that gives you incredible clarity. It’s got a big improvement in ease of use and we’ve included in that, which I think we’re very, very proud of is LPR, which is loss packet recovery, which means that even on a choppy network, an IP network can have loss packets and when you do have loss packets, unlike almost everybody else in the industry. In fact, everybody else in the industry, we’re able to recovery the packets in a much smoother and cleaner way. So we’re very, very excited about that and the HDX has got some real good growth and also the telepresence. Telepresence is ramping very nicely and not only is it in and of itself ramping well, but it’s because of the way architected our telepresence. First being immersive, which is very attractive to end user customers, but then the addition of being able to integrate smoothly with our RMX to do the online multi point and then with our HDX to be able to bring someone who doesn’t necessarily have a telepresence system, but maybe a desktop high definition solution or a room system solution. Integrate them into the telepresence. It’s really been a very nice solution sell. Complete from the desktop the room to the telepresence, including multi point, which we can do in a variety of ways for people.

Bill Choi – Jefferies & Co.

Do you have a number for percentage of revenue coming from new customers into video end point and compare that against last quarter?

Bob Hagerty

No, we haven’t broken that out.

Mike Kourey

I mean we don’t have it in exact detail, Bill, because as you know, some of ours sales of course is pure channel leverage. Much of the business we do touch, especially with the increased sales coverage, but our best is with our trade-in programs, where we do give credits of older products you may want to trade in and that would represent a low percentage of overall sales.

Bill Choi – Jefferies & Co.

Can you explain the Asia pack being down sequentially?

Bob Hagerty

Certainly we have seasonality. This quarter in Asia happened to have a lot of holidays that fell into it. We also kicked off our year and in that process we’re bringing in our sales force for about a week and a half and going through a number of training programs and then we bring in our channels as well. So we did lose a lot of selling days in Asia, because we accounted for both of them clearly, but it does make it a little more difficult in Q1 in Asia.

Bill Choi – Jefferies & Co.

So we do expect that to recover in Q2?

Bob Hagerty

Yeah, I think that was just an anomaly and Q1’s are seasonally interesting always and especially with the product transitions we’re doing with our RMX platform, our HDX platform, introducing three new products when you combine December in Q1 in the HDX family. There’s a lot of training, a lot of activity, and a lot of getting people up to speed. A lot of work going on about introducing these new products and showing people the differences and talking about the value proposition.

Mike Kourey

And another thing to keep in mind is that is a tough comp, right, because they were up I think it was 47% sequentially from Q3 to Q4. If you look at Q1 over Q3, not that I’m trying to justify it, but that is 22.5% up sequentially with Q2 over Q3. So it was a huge Q4 and it came a little bit off that, but still well over where it was in the third quarter.

Bill Choi – Jefferies & Co.

Yep, thanks.

Mike Kourey

Thanks, Bill.

Operator

The next question comes from the line of Jason Ader with Thomas Weisel. Please proceed.

Jason Ader – Thomas Weisel Partners

Thank you. Hey guys. So if I think about the lengthening of sale cycle comments that you made, is it fair to say it was kind of pretty much across the board? It sound like SpectraLink saw a little bit. It sounds like probably some videos, some network systems, certainly the conference phones probably weren’t great. So is that a fair statement? It was kind of across the board?

Bob Hagerty

I would say that the bigger the dollar value, the more time and energy it was taking to get things to move through the cycle and get closed.

Mike Kourey

It was weighted to the, in North America now, it was weighted to…

Bob Hagerty

In the U.S., sorry Mike, it was U.S.

Mike Kourey

Well yeah, but we don’t report U.S. separately per se, but for North America, which obviously the U.S. was the issue, not Canada. Canada actually had a great quarter.

Bob Hagerty

Yeah, a very good quarter.

Mike Kourey

But no, it was focused on the video, product and the network products, not the voice products.

Bob Hagerty

And again, I would say it’s probably more a large deal than it was any transactional business.

Jason Ader – Thomas Weisel Partners

Got you, okay, and then can you give more color on maybe some anecdotes on things that have closed. You know, you have like a few million dollar deal or something that you’ve already closed. You made that comment, so I feel like you’ve got to give us a little bit more than what you said, so could you help us there?

Mike Kourey

Well we don’t give names of customers unless they’re by press release for competitive reasons.

Jason Ader – Thomas Weisel Partners

I’m not asking for, yeah, not names.

Bob Hagerty

So we had some really good deals that ended up being a little frustrating, because they didn’t get done in the last week and ended up coming into the second week or first week and second week of this month. So I’d say that I was pretty pleased with the…I was disappointed with what we closed in the last week or last couple weeks of the quarter and very pleased with what we were closing the first week and second week of the quarter. So I think that that’s a good paraphrase.

Jason Ader – Thomas Weisel Partners

Is that abnormal, Bob?

Bob Hagerty

Yeah, I would say we left cooler and started hotter than what I would have liked.

Mike Kourey

We’re not going to get into the details here certainly, but we do as I think you may be aware, we have a very real time, multiple occasions per day, but let’s just say daily updates on bookings by theater versus the same point in time in the quarter of ill period, which is a very critical metric if you might imagine. It’s also year-over-year, which is a little less relevant. It’s certainly sequential is a big deal, QTD to QTD, and although certainly not going to quote the number. Just QTD as of today is in much better shape than North American than where we were QTD in the same day last quarter.

Bob Hagerty

Absolutely, and there was some big deals that I had to sign off that did end up coming in in the first two weeks.

Mike Kourey

So there’s data. This isn’t just….

Bob Hagerty

And again, I would say that’s, you know, the big number things, we have a lot of visibility, it’s a big number, big deals and several of them did come in week one and week two, which always prompts the question: why couldn’t we get this done a couple of weeks ahead?

Jason Ader – Thomas Weisel Partners

Let me ask you about the backlog, because that seems like it’s a little contradictory if you were having trouble closing deals at the end of the quarter, why would backlog be up?

Mike Kourey

Well let me explain something. Imagine if there’s flippages, some of that business you get in right toward the end of the quarter and just realistically you can’t get it out in that period of time. It’s something linearly issue and some of that occurred as well, that the linearly was where it started supporting 9%. It’s certainly not terrible, but not where we like it to be. That was worse than the year ago period by I think three percentage points. So that drives quarters in, but not orders out.

Jason Ader – Thomas Weisel Partners

Okay, so that’s basically, you know, that maybe speaks to NSD, because the network system side is configurations and things like that.

Bob Hagerty

Telepresence is the same way. I mean there’s several things that have it.

Mike Kourey

And if it comes in real late, it doesn’t matter what it is, you’re probably not going to get it out.

Jason Ader – Thomas Weisel Partners

Okay. Alright, now moving onto the inventory, I guess I’m struggling. Why was that up so much? I understand that it was up, because you didn’t close as much as you wanted to and so there’s some inventory there, but it was by $25 million. Is there something else that could account for that? I mean if you would have hit your numbers, you would have beat the street by, you know, whatever, $10 million bucks or $15 million bucks, or whatever it is. So is there something in that inventory number that is sort of abnormal?

Mike Kourey

Well it’s not abnormal. It’s fresh procurement that the problem was driven by linearity as well. So if you think about the way it works, first of all, obviously we did intend on the revenues being a bit higher obviously, so that’s part of it. Right? But you’re right, that’s only part. The other part of it is if you think about non-linearity, what that also drove was mixed issues where there were builds associated with ensuring that we had the availability of what the customers were going to need with the turnaround time that we’d like to try to accomplish. Short answer, that causes higher levels of inventory, because there’s some redundancy built into that and you put those factors together and there was some anomalies just over specific customer kind of a thing that rolled into Q2, which again, I can’t be specific as to who it was, but the main two factors where we ended up on revenue versus where we’d like to have been and two, the mix of kind of redundancy of mix to cover it, because of the non-linearity. We have guided down on GM and one of the drivers, one of the primary drivers quite frankly, is to adjust the absorption there.

Jason Ader – Thomas Weisel Partners

So on that point, how much of it was the guidance for gross margin? How much of it was due to mix and how much to absorption?

Mike Kourey

It’s heavily weighted to absorption.

Jason Ader – Thomas Weisel Partners

Okay, so should we expect in Q3, I know you’re not giving guidance, but should we expect gross margins to come back up to sort of 60 percentish? All else being equal, is that the right way to think about it?

Mike Kourey

All else giving equal, obviously we would always drive programs that we got a great ASP environment as you can calculate from our unit fund video, for instance. So you got a good ASP environment. You would look to over time drive gross margins as high as possible, but then again, you know, we’ve got some success with some of the handset partners. So we’re not rooting against that obviously. So, Jason, that’s a tough call. I get your point. Everything else given equal, yes, it would probably begin to come up, although I’d just want to be very conservative in that thinking until we get through that.

Jason Ader – Thomas Weisel Partners

Okay. I’ll take that as a yes. Thanks.

Operator

The next question comes from the line of Elliot Gold with TeleSpan Publishing.

Elliot Gold - TeleSpan Publishing

Thank you. I had a question about the network systems tape of the audio, but you have already answered it. So that was easy. Thank you very much.

Operator

The next question comes from the line of Manuel Recarey with Kaufman Bros. Please proceed.

Manuel Recarey – Kaufman Bros.

Thanks. Good afternoon, guys.

Bob Hagerty

Hey, Mannie.

Manuel Recarey – Kaufman Bros.

First, the IMFC of the unit, can you give it to me real quick again, Mike?

Mike Kourey

Sure. The groove video units, 19,618, and the desktop, 10,713.

Manuel Recarey – Kaufman Bros.

Thank you. I appreciate that. I’m thinking looking at your revenue guides of two to three sequential increase. You talk about you had flippage from the first to the second quarter, it has closed. Is the way to think of it that you’re just being conservative, because of the U.S. economic environment, because typically just the seasonality would be a little stronger from the first to the second quarter.

Mike Kourey

Well, yeah, if you look back, last year we guided two to three before the second discussion that got nearly to the point that it is today. We have experienced the downturn here in the states and there’s no reason that we would sit here today and pound the table, but that’s a one-time event. Obviously, we’re going to do everything we can to optimize our results in the U.S. regardless of where the economic environment is, but it would be fool hardy to not expect that that issue continues at least in the near term.

Manuel Recarey – Kaufman Bros.

Okay. Can you talk a little about the competitive environment. I know Siemens announced during the quarter that they just couldn’t be reselling a life-size encoding combination. Are you seeing more and more competitive coming into the marketplace like that?

Bob Hagerty

Well I’m not sure how you’re asking that question. We’re not seeing more competitors. We are seeing that the competitors that were in the market in 2007, so we’re not seeing new entries but we are seeing this is a competitive environment. People have a lot to talk about. A lot of value they can bring. We think our value proposition is better than the others. We are increasing our sales force to better articulate to customer why our solution is perhaps a better one, but there’s good competitors in this market as any good market. I think the real issue is this is a strong market with strong growth and it’s attracting a number of players who are also trying to serve customers. So I think I wouldn’t highlight that one as being particularly worrisome one from a competitive standpoint, but nonetheless there’s demand. People are looking to fill the demand and lot so of people have different value propositions. Some of them being the low cost. Some be the high quality. We think we have a nice combination in that regard.

Mike Kourey

And our focus is with the Via-Nortel..

Bob Hagerty

Right. I mean we’re trying to focus on the partners that we have and maximize coverage and keep the channel partners all with a strong value proposition so they can make the value chain, Acosytem makes money.

Manuel Recarey – Kaufman Bros.

Did you say any revenues from the three time partnership? Was that suppose to…the first quarter?

Mike Kourey

Yeah, we did see a little bit of revenue from Three Com in the period. Again, we’re not at liberty to talk about how much by partner, but it did start and there’s flows of their inventories of their prior products going through their hubs, etcetera, etcetera. So I can’t get specific about that, but yeah, we’re pleased to have that partnership, but it was small as far as dollar contribution in this period.

Operator

Your next question comes from the line of Greg McCorsen. Please proceed.

Greg McCorsen

Hey, Bob. Hi, Mike. Just a general question. It seems to me there’s a perfect environment for Polycom for obvious reasons. Have you thought about doing any targeted PR to get the word out? Like I say, it’s a perfect salesman’s scenario.

Bob Hagerty

So we have, well I mean multiple things going on to go to market front. Certainly we’ve invested a lot in sales resources, which are in the process of ramping up. There was quite a number lasted year. I forget the quote was on 15 months and the percentage we’ve grown in the last 15 months. $250 in 2007. So they’re all ramping, right? So that’s a positive thing and they’re learning with the marketing team how to approach line of business, how to approach the CIO, and there’s lots of good work going on in terms of that kind of marketing to sales interaction. And then what we talked about on the call and the thing that we’re really focused on is these integrated marketing campaigns. The first of which was the no buzz and it’s really leveraging off a lot of these new tools that you have with the Internet, with E-marketing, certainly the classics that work well for us or direct mails. So that was begun in the first quarter and now we’re beginning the telepresence, which when you think about telepresence you really have to look at the whole scope of the product line, because it’s telepresence in specific rooms and then the high definition rooms and the high definition desktops, which are very telepresence-like and so our solution expands, you know, when we go in with that telepresence campaign. It’s a pull of our total solution. Desktop, conference, telepresence room and the infrastructure that goes behind it. A word on the infrastructure – it isn’t just the RMX MCU in the classic sense where people were more of a voice-switched call. This is really where you’re doing multi-point, multiple views of the screen, and then all of the software that supports doing that in an ease of use manner. So a lot of work going on, a lot of value being brought, and we think we have a very, very compelling solution. So we’re starting to market on that one specifically has begun now and you’ll see that in your online business magazines, your online technical magazines, on e-targets, you know, search vehicles, and direct mailers, and a number of other venues too, including landing pages and all that you do in that environment.

Greg McCorsen

I think it’s a great environment and if I was 28 or younger, I’d send my resume and I’d work commission only, okay?

Bob Hagerty

I’ll pass that to the sales force.

Greg McCorsen

You have them call me up, okay? Good job.

Operator

The next question comes from the line of Scott Coleman with Morgan Stanley. Please proceed.

Scott Coleman – Morgan Stanley

Thanks for taking my questions, guys. Not to beat a dead horse here, but I’m trying to understand what went wrong towards the end of the quarter and how close to the end of the quarter business seemed to drop off. Given that it sounds like you’re referring to some large deal that got pushed into Q2. You stated that they’re now closed and shipping, yet you’re guiding from below seasonal growth. You’re talking about taking down build levels. Was there a competitive loss in there?

Mike Kourey

It was non-linear. The revenue through the quarter and to some degree through the last month of the quarter, of course. It wasn’t that it so much slowed down at the end of March. I mean actually when a lot of the activity was coming in. So it was the non-linearity, which of course causes mixed issues and those kinds of things and the fact the backlog is up and all of that and it’s not all large deals. What we said is some of that business that came in through Q1, that was due to come in in Q1, excuse me, was already in and shipping out in Q2. So the guidance is based on the fact that there is a U.S. economic downturn. We are experiencing it. That is our view and we would absolutely want to be planning for that. We’d want to be hedging at least that that will continue through the period and not count on immediate bounce-back of that one by next year.

Scott Coleman – Morgan Stanley

Okay. That’s helpful. In terms of linearity, I think, Mike, in the past what you’ve said is we kind of think about a 20-30-50 quarter percentage by market and that you’re off by three points. So does that mean if business was picking up towards the end of the quarter, is it right for me to conclude that it just started much softer the quarter than you would have expected?

Mike Kourey

There’s were starts, there were times when, yes, it came off January and some of those period it’s not as strong as you would see in other quarters, but keep in mind, that’s oftentimes typical, because Q1’s regardless of the environment are less linear than Q2’s and frankly 3’s and 4’s for that matter, because people coming in off holidays, off fresh CapEx budgets and there’s just reality of the machine going, if you will, the very beginning of the calendar year. So that’s kind of typical, but then it did, you know, if you get through February, it was non-linear. I mean we had only 51% of the quarter done through the end of February and that would be the most non-linear than since Q105. Q105 was more non-linear, but that was the last time a less linear Q1, a few years ago.

Scott Coleman – Morgan Stanley

Okay, that’s helpful. And then, so given some of the push outs and businesses closing here early in Q2, overall business a little softer and that is what you’re saying is that it’s just more macro related than anything else, in particularly U.S., but you haven’t seen that spill over into markets like Europe or Asia at least so far.

Mike Kourey

It really, I mean Bob should comment too, but frankly not really. Right? I mean if you look at the data, I mean Asia you could say - well geez, what did happen in Asia? I think that was a great question earlier, but the reality is if you look at Asia in Q1 versus any other quarter other than Q4, it went up 47% sequentially and was a great result. I think it was, like I said, 22.5% over Q3. So good year-over-year, I think like 26% or something like that. So the answer is not really. As a matter of fact, in North America, which we have next going Latin America. It’s North America meaning literally Canada and U.S. Canada had a gangbuster quarter, so it really does seem to be focused on the U.S.

Scott Coleman – Morgan Stanley

Thanks, guys. Appreciate the clarity.

Operator

The next question comes from the line of M. with Tiger Veta. Please proceed.

M. – Tiger Veta

Hi guys, a couple of questions. Can you give some ideas since some of the new products have been launched, especially the H.D. cable products. If you are seeing a lot of maybe pre-game attraction to market, especially when it comes to closing some of the market share loss during the course of last year?

Mike Kourey

Absolutely. The HDX products family grew 20% sequentially in the first quarter. So it was a terrific adoption and then the very high end of our video collaboration offering, the RPX and TPX family grew sequentially by 58%. So how that plays on market share, it’s very difficult to say. That data always comes out later once everyone has reported and the analysts have done their work. So it’s hard to say what that means, but we’re obviously quite happy with that. ASP’s are up, etcetera, and we did pick up some share in the fourth quarter of last year, which obviously we’re also happy about. You’re right, in Q1 through Q3, we had lost a little. So as far as how it plays in Q1, it’s too early to know.

M. – Tiger Veta

Would you say that the effect of new product launches have been relatively equivalent in all geographies or stronger in some versus the others?

Bob Hagerty

It’s pretty even. I mean there’s always a country here or there where amollogation takes a little bit longer, but the ACX product line came out with both ISDN and IP. It’s now a fuller product line. In late Q4, we introduced the 8000 product line and the 4000 product line, respectively, medium to large conference room and desktop high definition, and then we came out with a small-medium size room with the 7000. So that’s a very complete product line. Now that 7000 did come out mid-quarter or so, so now in the first quarter the sales forces of a complete line of high definition and we also brought out more of the RPX line or telepresence line introducing the TPX. So we sill had some product transitions going on in the first quarter. They come into the second quarter with a fuller product line than in high definition field than they did in the fourth or the first and that’s not to say we’re done with high definition or with telepresence, but the product line categories are more fully represented at this stage. Internationally, it’s a global launch.

M. – Tiger Veta

On the European side, business seems very strong there. Can you just maybe give us an idea of kind of by some of the sub-geographies there, kind of where your particular strength, particularly in the U.K. as well. Is it relatively weak compared to rest of Europe or are there any other reasons that it might be disproportionately weak or strong?

Mike Kourey

We have a broad base of revenue steams in Europe. I mean eastern Europe, frankly, include the middle east, and then of course the bigger markets in western Europe, like the U.K., like France, like Germany, Scandinavia offer breadth that it’s a good market for this space. So Europe has been very strong for us. I mean there’s some differences between the sub-geographies, but we’ve been quite pleased with our European team’s performance and frankly just the customer adoption. There have been cases by green initiatives, like what we had announce in the latter part of last year around NDS, the news corp subsidiary. There’s a lot of drivers there that seem to be having customers really see the benefits, the technology.

Bob Hagerty

And so we don’t really break it out by country when we talk about the classical market, you know, the three big countries and the rest of Scandinavia and all the rest.

So it’s a pretty broad-based growth that we’re seeing in Europe and of course, again, globalization or countrization, is one way to put it inside of Europe. Most of the companies now that we’re starting to deal with are dealing across Europe, so we’re seeing a little bit, a little more hard to characterize it by country and that we would close say a company in France, but their installations would go in all throughout Europe or U.K. and the rest of the installations are going throughout other parts of Europe. Obviously, even more so on a globalized basis, where you find a headquarters in Europe, Asia, or the United States, and the installations are going in some other continent.

M. – Tiger Veta

Would it be possible to just break up just the video conferencing only….just North America and Europe, kind of how they did on the video conferencing side alone?

Mike Kourey

We just don’t do that for competitive reasons. There’s market data that will come out through some of the market analysts when they aggregate that, but we do not break out our individual product lines by geography externally.

Operator

The next question comes from the line of Tavis McCourt with Morgan Keegan. Please proceed.

Tavis McCourt – Morgan, Keegan & Company Inc.

Hey guys, just a couple of follow-ups. Given the 20% sequential growth in HDX, where does that bring roughly HDX shipments relative to overall video shipments? Is it billed under a third?

Mike Kourey

Let me pull out data sheet. I should be able to get that. It’s in the low to mid-30’s.

Tavis McCourt – Morgan, Keegan & Company Inc.

Okay, and fair to say the increase in the inventory balances this quarter is on the video side of the business?

Mike Kourey

There was some in other areas as well, but clearly a chunk of that was video, a big chunk.

Tavis McCourt – Morgan, Keegan & Company Inc.

Then just on the voice business, it looks like my numbers might be wrong, but it looks like it kind of grew somewhere in the 8 to 10% range year-over-year and it just look…

Mike Kourey

Which product line, Tavis? Voice was 11%.

Tavis McCourt – Morgan, Keegan & Company Inc.

11%. It looks like it’s just kind of trending down over the last few quarters to a mature business, which is okay, but you didn’t seem to suggest that there was any kind of large deal slippage in that particular business. I’m just wondering, is that something that, you know, what will it take to get that revenue stream reaccelerated again after, you know, you obviously had a number of great years of growth from that business. Are we just seeing it naturally mature or is it realistic to think that business can reaccelerate at some point?

Mike Kourey

I think it’s realistic to think it could. No guarantees, I suppose, but as we talked about with this new product line that has no interference from GSM devices, blackberries, and that kind of thing. That gives people a very strong reason to upgrade, because for a few hundred dollars, it’s just the productivity improvement in one meeting, it’s benefits to not have that interruption asking everyone to turn off their cell phones, etcetera. So that’s one. We also by the HD voice, which provides a voice experience that is as good as a regular sound station is. It’s a dramatic improvement of fidelity of the voice and the realism of that voice being in the same room. I think a fundamental reason to do it. We also have a new industrial design out now with the sound stage in IT 7000, which is as very exciting as the sound stage look is. It’s going to look stale if you don’t upgrade to the latest look here in the future, which has a very appealing new industrial design for that product. So three great reasons there that for a few hundred dollars, people are going to want to upgrade and drive further penetration, because we’re only in 15% of meeting rooms. 85% don’t have them. So we’re actually excited about those drivers. We’re not excited about the economic downturn and that’s in voice as well as the other lines, but there’s reasons to believe that yeah, we could drive some real business there.

Travis McCourt – Morgan, Keegan & Company Inc.

And you used to call out the growth rate on the desktops on business back when it was a smaller business and still growing kind of triple digits, but what kind of growth are you getting out of the desktops on the market? Is it still kind of substantially double digit growth or is that part of the business matured as well?

Mike Kourey

Substantially double digit I believe, but certainly not triple digit and it did have a bit of a tough quarter.

Bob Hagerty

Remember, we’re strongest in the U.S. in the voiceover IP as well on the conference, quite frankly. Conference phones, the largest single business has always been the U.S. and obviously growing very nicely in other parts of the world, but it’s a bit headcount dependent and so to the extent that the U.S. economy has a headwind, we end up with a little bit of headwind in that product line.

Operator

There are no further questions at this time. Please proceed.

Bob Hagerty

Thank you very much for following Polycom as we build our leadership and brand through our HD innovations, strategic partnerships, and increased sales coverage. 2008 promises to be an exciting year. We look forward to updating you on our successes and as we move each step of the way. Thanks, and we’ll see you next time. Bye.

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