Polycom's CEO Discusses Q2 2012 Results - Earnings Call Transcript

| About: Polycom, Inc. (PLCM)

Polycom, Inc. (NASDAQ:PLCM)

Q2 2012 Earnings Call

July 24, 2012 5:00 pm ET


Eric Brown - COO and CFO

Andy Miller - President and CEO

Laura Graves - IR


Jim Suva - Citi

Jess Lubert - Wells Fargo Securities

Kent Schofield - Goldman Sachs

Tavis McCourt - Raymond James


(Operator Instructions) I would now like to turn the conference call over to Eric Brown, COO and CFO.

Eric Brown

Good afternoon, and welcome to the Polycom's second quarter 2012 earnings call. I'm Eric Brown, Polycom's Chief Operating Officer and Chief Financial Officer. I am joined by Andy Miller, Polycom's President and CEO. Our Head of Investor Relations, Laura Graves, will be monitoring our call remotely today.

As with previous quarterly calls, Polycom is augmenting today's voice conference call with a video webcast. If you would like to receive the full webcast, please open your web browser at this time and enter Polycom's homepage, which is polycom.com, and click on the Q2 2012 earnings call link.

Please note that the Q&A session will be hosted via audio stream. For the analysts participating in the Q&A session, please leave your voice call live, so you can use your conference call connection for the Q&A session at the end of our call. We welcome all others to listen into the Q&A session.

This webcast and a transcript of the prepared remarks will be maintained on Polycom's website for at least three months. We will be making forward-looking statements on this call including future product offerings, future trends and expectations and guidance regarding expectations of future financial performance which is subject to risks and uncertainties that could cause actual results to differ materially from our expectations. Please note that any financial guidance that we provide on this call is valid as of today only and we do not assume any responsibility to provide any updates to this guidance regardless of changes which may occur in the future.

We discuss a number of the business risks that may cause our actual results to differ in detail in Polycom's SEC reports, including our most recently filed quarterly report on Form 10-Q for the quarter ended March 31, 2012, and any forward-looking statements must be considered in the context of such risks and uncertainties.

We will be presenting both GAAP and non-GAAP financial measures today, please refer to our reconciliation of GAAP to non-GAAP financial measures in today's earnings release, which is also posted on our website.

Polycom's application of U.S. GAAP requires disclosure and availability of new products, planned features and upgrades discussed during this call are subject to change or cancellation.

At this time, I'd like to turn the call over to our CEO, Andy Miller.

Andy Miller

Thank you, Eric, and good afternoon everyone. Q2 was a solid quarter for us financially. We continued to invest in innovations that we believe will ensure our customers have the best UC solutions today, tomorrow and well into the future.

First, I'll discuss our financial performance at a high level, then I'll provide a broader context around the innovative new solutions we expect to bring to market in the second half of 2012.

Polycom announced total revenues of $379 million in Q2, representing growth of 4% on a year-over-year basis, and up 3% sequentially. On a year-over-year basis, UC Group Systems grew 7% and UC Platform grew 6%. This is very important as we believe it underscores solid demand for video endpoints.

Polycom recently announced plans to divest its Enterprise Wireless Solutions business or EWS, in order to allow us more sharply focused on our product and technology portfolios, on our core unified communications and video collaboration solutions. As a result, EWS will now be reported as discontinued operations.

Excluding EWS revenue in each of the comparable periods, Polycom achieved revenues in the second quarter of $359 million, representing 5% growth on a year-over-year basis, and up 4% sequentially. On a non-GAAP earnings per share basis, again excluding EWS, we generated $0.22 per share, which was $0.03 per share above our post EWS announcement guidance midpoint.

Now, let me set the context for the innovations we are bringing to the market, what we believe, they will mean for our industry and for our customers. Polycom is preparing for the largest launch of new innovations and solutions in our 20-plus year history. Solutions that are natural extensions of what our customers have today, that will attract new customers and will grow our total addressable market.

We have a very aggressive vision at Polycom, is to make video collaboration ubiquitous with us. So to deliver on our vision, our strategy is to make video and voice collaboration simple to use and available to everyone through open standards-based solutions, deliver to meet the needs of our customers, whether on premise, hosted, cloud-based or over the web.

As the leader in open standards-based unified communications, we are paving away for businesses to expand from traditional hardware-based collaboration to the new world of software, cloud and web video collaboration solutions. We began this effort two years ago, when we added a RealPresence Platform development roadmap to our tradition of voice and video endpoint portfolio.

Last year, we delivered the RealPresence Platform along with software and mobile products, and we continue with our R&D innovations. Quarter-after-quarter we've made excellent progress in helping our customers modernize their UC environments. In Q2, we had some outstanding customer wins that we believe underscore the fact that our strategy is truly working.

Through our partnership with Microsoft, we secured a major win at a large Canadian financial institution, where native interoperability, resiliency and redundancy enabled by our RealPresence Platform between Immersive Telepresence and Microsoft Lync was a key selling feature.

We also landed a $1.4 million deal in CALA for full video collaboration solution that included the RealPresence Platform at the core, numerous HD hardware endpoints, and again integration with Microsoft Lync.

These two examples above demonstrate that our strategic partnership with Microsoft is truly valuable to our customers. And you may have heard last week that Microsoft announced that 45% year-over-year growth in their Lync business, indicating that there is excellent traction for Lync. Microsoft Lync jointly deployed with Polycom video interoperability and scalability is a very powerful combination.

We secured a gratifying win at a leading U.S. technology company, who brought us into solve the interoperability problems between their existing Cisco video endpoints. We believe this is an excellent example, why our approach to interoperability is superior. We are excited about the opportunity for follow-on sales of our own endpoints, cloud and mobile solutions.

And finally, our preeminent e-commerce retailer chose Polycom in the first of a multi-phase rollout to connect various heterogeneous platforms through our RealPresence Platform at the core. Larger deals like these delivered multiple phases is why Polycom moved to a high touch sales model and solution selling. Again, a prove point that our strategy is in fact working.

So what is our view of the industry as it stands today. The industry is undergoing a major transition as customers look to modernize their UC infrastructures and develop strategies to give them the broadest choice for video collaboration, along with the greatest flexibility of delivery options at compelling price points.

In some cases this will allow organizations to procure UC video as an operating expense, instead of an upfront capital expense. Evolving UC technology solutions provide additional levels of choice for the customer and an incremental revenue opportunity for Polycom.

Now, clearly there has been a mark shift in projected industry growth rates by analysts over the last six months, as the UC industry goes through a natural technology evolution. Gartner, IDC and others would tell you that the world has move into pervasive UC video that the balance and mix of form factors will in fact change.

Polycom's growth is keeping pace with analyst estimates and in fact we are taking share. In fact, Polycom gained share at the expense of our largest competitor in the first quarter of 2012, while smaller players remain flat as a percentage of total revenue.

Startup companies in this phase are at a disadvantage selling to the enterprise, where interoperability and investment protection is critical. Given our results today, combined with the anecdotal evidence that we are hearing in the market, I believe that Polycom again gained share in Q2.

We plan to aggressively lead this next phase in the industry with Q4 product launches that we feel are far superior to Cisco and traditional enterprise, and directly competitive with emerging ad-hoc conferencing such as Blue Jeans and software MCU providers like Vidyo.

These new Polycom products will feature true native interoperability and backward and forward compatibility that we believe is unmatched by any competitor. We believe these products will increase our total addressable market otherwise known TAM, offer incremental revenue opportunities to Polycom, and provide lower cost options to our customers.

A prime example of this is the new upcoming multi-protocol Polycom software MCU or Media Control Unit. I believe this will lead to better choice for our customers and our lower total cost of ownership, while yielding an attractive gross profit margin.

Customers and partners continue to tell us that the key long-term UC imperatives to drive adoption are as follows: multi-vendor integration capability in a heterogeneous environment; superior total cost of ownership; superior user experiences and ease of use; flexible multi-mode delivery, including on-premise cloud, SaaS and mobile.

We believe this placed Polycom strength give it out open standards-based product line, native interoperability with Microsoft Lync and long-term product strategy to enable seamless video collaboration and interoperability by connecting traditional, mobile, and cloud and web-based endpoints.

We just announced significant enhancements to our RealPresence Platform for enterprise and service providers, including a rich new suite of open APIs, to facilitate the development of customer applications, integrate business processes such as provisioning and billing, and extend the value of the RealPresence Platform.

For service providers, we announced carrier-class multi-tenancy support that we believe will enable them to create and deliver video as a service in cloud-based offerings more easily and cost effectively than ever before. More than a dozen service providers, including Airtel, China Unicom and 8x8 are already using the RealPresence Platform to power video as a service.

Our interoperability announcement with Acme Packet simplifies business-to-business connectivity and Firewall Traversal. And we announced the new Polycom RealPresence Resource Manager, a scheduling management and provisioning solution that increases the scalability for the RealPresence Platform by 100% to support up to 10,000 devices. This enables large enterprises to better support the YOD trend.

And finally, we announced enhancements to RealPresence Mobile that include far-end camera control from the Tablet. Smartphone and Tablet proliferation continues to grow rapidly and all of these devices are video enabled. Polycom is uniquely addressing this opportunity with a highly secure enterprise-class mobile video solution that runs across multiple Tablets and Smartphones.

Nearly every organization has a heterogeneous or multi-vendor communication environment. As leaders in the UC industry, our mission is to seamlessly transition organizations to modernize their UC environments. In our opinion, no other company is better positioned to do this than Polycom.

We are proud of Polycom's innovation and technology leadership and our growth in market share. And you should expect more product announcements between now and in the year in the areas of best-in-class user experience, significant expansion of web and cloud-based video collaboration solutions and continued innovation to software-based multi-protocol solutions. To better support these product launches, we are also getting closer to our customers and partners in the second half of this year.

First, we are consolidating our U.S. Federal and GEM Team under one umbrella called public sector. Secondly, our EVP of Worldwide Sales, Tracey Newell, will be increasingly concentrating her time on North American enterprise, preparing that team for upcoming product launches and stimulating growth.

As a result of this improved alignment, David Ruggiero, would be leaving the company. This will provide us with the ability to better focus on enterprise and public sector as we feel we are on a prime position to take market share in those areas.

I'd now like to turn the call over to Eric, to review our Q2 results and guidance to the end of 2012. Eric?

Eric Brown

Thanks, Andy. As a reminder again, on May 10, 2012, we announced a definitive agreement to divest our Enterprise Wireless Solutions or EWS business. We are working to close this transaction in the second half of 2012.

As a result, for financial reporting purposes, the results of EWS are considered discontinued operations for all periods presented. And EWS revenue and related expenses are shown net of taxes as discontinued operations in our statement of operations and excluded from results. Prior periods have been restated to conform to the current period presentation.

Including EWS, Polycom generated revenues of $379 million in Q2, 2012, which equates to 3% sequential growth and 4% year-over-year growth. Polycom generated earnings per share of $0.24 on a non-GAAP basis.

Our guidance for the quarter was revenue of $367 million to $377 million and non-GAAP EPS of $0.20 to $0.22. So we had over performance at the topline and the bottomline.

On a standalone basis, the EWS business and Q2 revenues of $21 million and contributed non-GAAP EPS of $0.02 consistent with what we've forecasted. Last year, EWS had revenues of $25 million for Q2, 2011.

For the reminder of my discussion, all results are based on our continuing operations and exclude the EWS results, unless otherwise noted.

Polycom generated revenues from continuing operations in the second quarter of $359 million, representing 5% growth year-over-year compared to Q2 of last year.

Looking at revenue from continuing operations by geography, Americas revenues were up 3% compared to the same period last year with the growth coming from the enterprise vertical. We completed training for enterprise account selling at our TEAM Polycom event starting in early April 2012, and by the end of Q2 trained nearly 2,000 partners on our RealPresence video solutions platform and services across the globe.

EMEA revenues were down 2% compared to last year, driven by a difficult macro environment that resulted in reduced closed rates towards the end of the second quarter. EMEA has a well established team that outperformed throughout last summer's European slowdown and has posted solid year-over-year growth for the preceding nine quarters.

Based upon what we experienced in Q2, however, we believe it is prudent to expect ongoing challenges in Europe, as the growth rates of Russia and Middle East will be more than offset by declines and other countries in the Eurozone.

Asia-Pacific revenues were up 16% compared to last year. We believe we are well positioned in Asia-Pacific as evidenced by our 51% market share in China during calendar year 2011. China growth was strong and we had excellent year-over-year services growth in the region. We did see elongation of sales cycles in the region and this contributed to the reduction in growth rate versus what we saw in 2011.

Q2 revenue from continuing operations by product category, including the services attached to each was as follows: UC Group Systems, which includes Immersive Telepresence, group video and group voice systems grew 7% year-over-year to $252 million or 70% of revenues in Q2; UC Personal Devices, which includes all desktop video devices and desktop voice was down 3% year-over-year to $43 million, representing 12% of revenues in Q2;UC Platform revenue, which includes the Polycom RealPresence Platform grew 6% year-over-year to $64 million, comprising 18% of revenues in Q2.

The Q2 revenue mix was 76% product and 24% services. Year-over-year product revenue is down 4% with gains in APAC offset by decreases in the Americas and EMEA. Services revenue was up 48%, driven by the Halo acquisition last year.

From a channel standpoint, the revenue breakdown for the second quarter is as follows: 27% through value-added resource; 64% through distributors; 8% through service providers; and 1% direct. Please note that approximately six percentage points of our distribution business in Q2 was driven by the ITSPs and other service providers fulfilled through distribution, making service provider revenue 14% of the Q2 total.

Now, I'd like to provide information on revenue metrics. The following is based on information reported by the field. Please note that this information is not complete in terms of our total transaction volume and is based on a bookings view of transactions closed in our salesforce.com system, not GAAP revenue. This is intended to provide the basis for a representative view period-to-period on our sales trends.

We had a total of 621 transactions greater than $100,000 this quarter compared to 542 in Q2 last year. We had a total of 8 transactions greater than $1 million this quarter compared to 13 in Q2 last year. Midsized transactions in the $250,000 to $500,000 range were up 11% year-over-year. We recorded 51% of revenues in the third month of the quarter compared to 49% in Q2 last year.

Moving to the P&L for continuing operations, non-GAAP gross profit margins for the second quarter were 60.9%, down 200 basis points from Q2 last year, primarily as a result of the lower margin managed services business we acquired from HP in 2011.

Polycom's non-GAAP operating expenses increased sequentially in absolute dollars, but decreased sequentially as a percent of net revenues with non-GAAP operating expenses representing 47.8% of net revenues in Q2, up from 46.6% in Q2 last year and down from 48.2% of net revenues in Q1, 2012.

Q2 non-GAAP operating expense line items were as follows: sales and marketing expense represented 30.2% of revenues for the period, up from 29% in Q2 last year. As a reminder, our annual partner and sales event, TEAM Polycom, occurred during Q2 in 2012 and contributed to roughly 1 point of the increase over Q2 last year.

R&D expense was 12.5% of revenues, flat when compared to 12.6% in Q2 last year. And G&A was 5.1% of revenues versus 4.9% in Q2 last year. Q2 non-GAAP operating income decreased to 15% year-over-year to $47 million or 13.1% of net revenues. This compares to $56 million in non-GAAP operating income or 16.3% of net revenues in Q2 of 2011.

Other income and expense in Q2 was a net expense of approximately $1 million comprised of $0.3 million of net interest income and approximately $1.3 million of net other expense, including the impact of foreign currency, equipment disposals and non-income related taxes in certain geographies.

Our Q2 non-GAAP effective tax rate was 16% and our GAAP effective tax rate for continuing operations was 19%. Q2 GAAP diluted EPS from continuing operations was $0.01 compared to $0.14 in Q2 of last year. On a continuing operations basis, Q2 non-GAAP diluted EPS was $0.22, down compared to $0.24 in Q2 of last year. As stated earlier, before the classification of EWS as discontinued operations, our Q2 non-GAAP diluted EPS was $0.24 per share.

Turning to the balance sheet. We exited the second quarter with cash and investments of $615 million and Polycom continues to be debt free. We have the equivalent of approximately $3.50 per share in cash and investments. Polycom's deferred revenues grew to $239 million in the second quarter, growing 2% sequentially and 31% versus last year.

We purchased $20 million of shares under our share repurchase program in Q2. As of June 30, we have 58 million remaining in our repurchase authorization.

As previously announced, contention upon the closing of the sale of the EWS business and the receipt of the net proceeds, we will be increasing our total share repurchase program by approximately $100 million. We continue to believe that share repurchase is an effective way to provide value to our shareholders.

Moving to accounts receivable. We ended the quarter with total AR of $212 million resulting in a DSO of 54 days, which is comparable to the prior quarter, and up versus the 46 days in Q2 last year due to the more backend loaded quarter this year. Inventory turns in Q2 were 5.6 compared to 5.0 in Q1, and 5.4 in Q2 last year.

We generated $41 million in operating cash flow in the quarter. On a trailing 12-month basis, our operating cash flow was $242 million, up 13% compared to the 12-month period ending Q2 2011. With approximately $3.50 in cash per share as of the end of Q2, our current enterprise value is less than 5 times our trailing 12-month operating cash flow.

Moving to headcount. Polycom had 3,974 employees at the end of Q2, up 3% from the end of Q1. By expense area we had the following number of employees: cost of goods 834; sales and marketing 1,430; research and development 1,129; and G&A 581.This includes 217 employees that are part of the EWS business, the majority of whom are in the R&D and cost of goods categories.

Moving onto Q3 and Q4 guidance and outlook. Given the upcoming second half product launches, we are providing guidance for both Q3 and Q4. This guidance reflects our continuing operations, so we will be excluding the Enterprise Wireless contribution, which would otherwise be roughly $20 million per quarter in revenue.

The following key assumptions are reflected in our guidance for continuing operation. First, the second half of 2012 will include a very broad ranging set of new product launches in Q3 and Q4, staring with the Resource Manager, which was released this month. Some of these new products will be software like the Soft MCU and other new products will supplement our portfolio.

Second, we did see a weakening in European demand at the end of Q2 and consistent with trends observed by other companies, we are assuming that our Q3 revenue in Europe will be down sequentially. And this decline will offset the expected sequential September quarter increase from the U.S. Federal vertical.

For the second half of 2012, we are making expense reductions in certain areas. However, the absolute level of reductions is impacted by the priority of completing and launching our new products. This requires committed R&D spend.

Our Q3 guidance for continuing operation is as follows: revenue ranging from $325 million to $335 million, with the key variable being the European macro economic environment; non-GAAP gross profit margins ranging from 59.8% to 60.2% of revenues; total non-GAAP operating expenses ranging from 53.7% to 55.1% of revenues; non-GAAP operating income ranging from 4.7% to 6.5% of revenues; a GAAP tax rate of 21% and a non-GAAP tax rate of 21%; share count of an estimated 180 million diluted shares, exclusive of stock repurchases; GAAP EPS ranging from a loss per share of $0.09 to $0.11; and non-GAAP EPS ranging from $0.06 to $0.09.

Our Q4 guidance for continuing operations is as follows: revenue ranging from $355 million to $365 million, with the key variables being North America enterprise calendar yearend budget utilization and our Q4 product launches; non-GAAP gross profit margins ranging from 60.1% to 60.3% of revenues; total non-GAAP operating expenses ranging from 49.3% to 50.1% of revenues; non-GAAP operating income ranging from 10% to 11% of revenues; a GAAP tax rate of 21% and a non-GAAP tax rate of 21%; share count of an estimated 180 million diluted shares, exclusive of stock repurchases; GAAP EPS ranging from $0.01 to $0.04; and non-GAAP EPS ranging from $0.15 to $0.17 per share.

Our second half expectations are made against the near-term backdrop of what we believe will be challenging summer quarter in Europe, a potential slow down in China growth will be at 51% market share, and a year-over-year comparable to the second half of 2011 that included two very large transactions.

The Q3 and Q4 product launches are significant as it move our business from traditional hardware-based video collaboration solutions and extend our reach with software, cloud and web-based solutions. We expect to exit 2012 extremely well positioned versus our principal competitor Cisco and with greater addressable market space in the more rapidly growing cloud and software segments of the UC market.

Now, let me turn the call back over to Andy for closing comments.

Andy Miller

Thank you, Eric. I'm very proud of what we have accomplished through the first half of 2012. I believe we are not only taking market share against Cisco, but also against Huawei and our emerging competitors. And we are delivering products that we believe are best-in-class and that will allow Polycom to increase our total addressable market.

Reflecting back to when I became CEO two years ago, we had frankly an out of position roadmap and no RealPresence Platform strategy. We have spent the last two years developing technology that we felt would be game changing, and now in the second half 2012, you will see the product roadmap unfold.

This product roadmap has been reviewed under NDA, by industry analysts, our largest customers and partners, and their feedback has been extremely and overwhelmingly positive. We looked forward to unveiling this product roadmap publicly in early October.

We are very focused on the second half product launches and intend to maximize this window of opportunity. We are evolving our go-to-market strategy, preparing for acceleration of growth and delivery of a new software and cloud offerings. It's very important to understand that Polycom intends to be the leader in virtualized software, which will redefine the video and collaboration industry and set Polycom apart as the undisputed leader.

Now, we would like to switch to the audio portion of our call for Q&A. As we discussed earlier in the call, many of the statements we've made and will make during the Q&A period are forward-looking statements, which are subject to many risks and uncertainties. There's a conference call operator available at this time.

Question-and-Answer Session


(Operator Instructions) And our first question comes from the line of Jim Suva with Citi.

Jim Suva - Citi

The question I have is that, it sound like you have a very exciting line up of new products coming out the door later this year. With those products coming out the door, can you help address any concern about people who are currently buying your products in near-term GAAP and purchasing or they all going to be like software upgradeable through their contracts, which would then allow basically one to say that Q3 EPS may actually be the worst case scenario or the base of a new low level for Polycom's earnings and just kind of onward and upward scenario. Are you willing to draw the line there for Q3? And what about the potential pause for the transition of the new products?

Andy Miller

I'm going to take the first half around the products and I'll turn it over to Eric. So we have been very careful to announce a set of solutions that are backward and forward compatible, that are incremental in nature, that are software, cloud, and web-based that will allow a very graceful, not only upgrade by our customers, but for the customers that have today's products and for the customers that buy tomorrows products will have a very similar look and feel and user experience.

So as I talked about before, we have been tremendously careful to make sure that not only do we not cannibalize any of our current technologies, we frankly give a customer a choice between OpEx or CapEx, and an opportunity to continue to enhance their system through software. So Eric and I and the team have been very careful as we build that into the roadmap.

And as I said before, we are going after very clearly the ad-hoc addressable market that companies like Blue Jeans participate in today. We are going after the market, there are companies like Vidyo and others participate in that offer Soft MCU. And not only do we feel that we will have a better product than our early stage competitors, but a superior product line to Cisco Systems around interoperability, ease of use, upgradeability and also interoperability with Lync.

So with that said, let me turn over to Eric on the Q3 EPS.

Eric Brown

It is important to note that we've launched new products in the past and we've used that as the basis for determining what are Q3 and Q4 looks like. And that's again, one of the reasons we are prescriptive, providing two quarters of guidance here through the launch period.

The products in some cases that we are launching the software MCU are supplemental and any other products that we might launch, and we'll provide more details on that in early October, will be completely forwards and backwards compatible. And so customers can purchase with confidence in the September quarter. So net, this has all been taken into account and factored into our non-GAAP guidance for the third quarter.


Our next question comes from the line of Jess Lubert with Wells Fargo Securities.

Jess Lubert - Wells Fargo Securities

I was hoping you could discuss how you're feeling about the state of the North American sales force. It seems like you're making some additional leadership changes here. So I think it will be helpful to understand, how you're thinking about this region? And to what extent you believe you have the right people in place now, if the regional organization stabilize and to what degree you believe there is additional work to be done?

Eric Brown

As we rollout the results in the Americas and North America, we had a consistent growth year-over-year in the second quarter as we did in Q1. I think that one of the other things that you'll find in the reported metrics is that our total transaction volume deals above $100,000, is up. And so we feel that we're making good progress in terms of our efforts to solution selling enable the North America team.

Andy Miller

Let me just add on a comment to that. The two things that are very applicable to our business right now, the first is, and I mentioned both of them on the call, we feel very strongly that our federal market and our government educational and medical market have some significant similarities. So we've made a choice that is very similar to have other companies moving forward, which is frankly to separate that business entity and bifurcate it from the enterprise group. Because it is not only a very different business, but requires very different skill sets.

So I think that the extraction of Federal and GEM from North America is going to be very healthy, not only for the Fed and GEM growth rates, but will allow the enterprise group to focus distinctly on enterprise logos and competitively hold accounts.

Secondly, as I mentioned we frankly have reduced a layer to get closer to our business. And Tracey, who has vast experience in North America will be taking on the additional responsibility of getting very close to the area of Vice Presidents. We have great stability, both in the EVPs and RDs and the sales team. So we are confidence with Tracey's leadership and with the kind of this new public sector group of GEM and Federal that will actually be able to stimulate growth off of the very stable North American platform.


Our next question comes from Kent Schofield with Goldman Sachs.

Kent Schofield - Goldman Sachs

On the new products that you have coming out in the second half of the year, it does seem like some of those competitors that you've mentioned focused on pricings. So I was wondering how you think that will compare to those competitive offerings on your new products?

Eric Brown

First of all, I'd say that the pricing environment was relatively stable this past quarter. We stepped up our surveillance efforts in head-to-head in competition scenarios against Cisco and some of the other startup companies. And we believe we're competing very, very effectively.

The new products, again, when we speak to you for example, the software-based multi-protocol MCU, will indeed deliver a lower cost per user per port to our customers at the end of the day. Allow delivering very good gross profit margins to Polycom. And so I think that there is an opportunity for all stakeholders in regards to the launch of the software MCU.

Andy Miller

I'd just add, Eric, that what we've found, as we've looked at the marketplace as you kind of go into that low-end, mid-to-SME market is there is clearly price sensitivity. And what we want to be able to offer our customers a choice, whether it's the OpEx model, the cloud-based model, the web collaboration model or the traditional model. So I believe that from a gross margin perspective we'll be in a very healthy place.

And frankly for the first time in our history, we'll be able to address all the markets from the SME through mid-market, to enterprise, to global, because many of these solutions, the ad-hoc solutions and the Soft MCU solutions, not only pertain to the SMB market, but also throughout enterprise and large enterprise. So I think it would be throughout the second half of the year will be very well suited for complete product portfolio.


Our next question comes from the line of Tavis McCourt with Raymond James.

Tavis McCourt - Raymond James

Andy, it sound like obviously a lot of transition going on with new products. And I think one of the thing that's happening to this industry is there is likely to be some changes in how customers are served as well. And I'm wondering how much should we expect kind of changes in channel strategy or your relationships with the end-customer to you to become more direct or more indirect or do you really view this as simply an updating of the product portfolio?

Andy Miller

No. I think it's a holistic transition for the industry. Clearly, as we move into the video as a service model that will not to be served by us directly, that will come through our partners. But many of those partners frankly will be new partners than traditional buyers or current distributors.

So I think it will be a mixed market. There will be the traditional markets provided by the traditional channel partners. But clearly as we move into software and video as a service, some of those will be the telcos of course, some of those would be the ITSPs, and frankly some of those will be enterprise software channels like Microsoft Lync channels that will be new to our channel portfolio.

So it has to be a holistic. It cannot be just the tremendous products we'll be bringing to market. And we've thought very well through. And I think Eric has a comment, in terms of how we intend to distribute and serve these customers.

Eric Brown

Yes. I will say that one of the opportunities that we see moving forward is on the services side overall. And we think we can do a better job working with our existing partners to get better maintenance attached as we move into more solutions, there is more demand for advanced solutions. And that's something where we and our existing partner network I think can benefit together with the existing products and the new upcoming products.

And so we don't anticipate any major changes, any disruptions. And the product portfolio that we're launching over the next six months will move through the channels we think easily and efficiently.


There are no further questions at this time. I will turn the call back to you. Please continue with your presentation or closing remarks.

Andy Miller

Great. So thank you, everyone. In closing, I'd like to thank everyone for the continued support of Polycom. And we look forward to speaking with you again soon. Again, thank you. And have a great day.

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