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PLCM > SEC Filings for PLCM > Form 10-Q on 1-May-2014All Recent SEC Filings

Show all filings for POLYCOM INC

Form 10-Q for POLYCOM INC


1-May-2014

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS IN CONJUNCTION WITH OUR CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES. EXCEPT FOR HISTORICAL INFORMATION, THE FOLLOWING DISCUSSION CONTAINS FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934. WHEN USED IN THIS REPORT, THE WORDS "MAY," "BELIEVE," "COULD," "ANTICIPATE," "WOULD," "MIGHT," "PLAN," "EXPECT," "WILL," "INTEND," "POTENTIAL," "OBJECTIVE," "STRATEGY," "SHOULD," "DESIGNED," AND SIMILAR EXPRESSIONS OR THE NEGATIVE OF THESE TERMS ARE INTENDED TO IDENTIFY FORWARD LOOKING STATEMENTS. THESE FORWARD LOOKING STATEMENTS, INCLUDING, AMONG OTHER THINGS, STATEMENTS REGARDING OUR UNIQUE POSITION AND ANTICIPATED PRODUCTS, IMPORTANT DRIVERS, CUSTOMER AND GEOGRAPHIC REVENUE LEVELS AND MIX, GROSS MARGINS, OPERATING COSTS AND EXPENSES AND OUR CHANNEL INVENTORY LEVELS, INVOLVE RISKS AND UNCERTAINTIES. OUR ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE FUTURE RESULTS TO DIFFER MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD LOOKING STATEMENTS INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS" IN THIS DOCUMENT, AS WELL AS OTHER INFORMATION FOUND IN THE DOCUMENTS WE FILE FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE COMMISSION, INCLUDING THE ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2013.

Overview

We are a global leader in open, standards-based unified communications and collaboration ("UC&C") solutions for voice, video and content collaboration solutions. Our solutions are powered by the Polycom® RealPresence® Platform, comprehensive software infrastructure and rich application programming interfaces ("APIs") that interoperate with a broad set of communication, business, mobile, and cloud applications and devices to deliver secure face-to-face video collaboration across different environments. With Polycom® RealPresence® collaboration solutions, from infrastructure to endpoints for all environments, people all over the world can collaborate face-to-face without being in the same physical location. Individuals and teams can connect, communicate, and collaborate through a high-definition visual experience from their desktops, meeting rooms, classrooms, home offices, mobile devices, web browsers, and specialized solutions such as video carts for healthcare applications. By removing the barriers of distance and time, connecting experts to where they are needed most, and creating greater trust and understanding through visual connection, we enable people to make better decisions faster and to increase their productivity while saving time and money and being environmentally responsible.

We sell our solutions globally through a high-touch sales model that leverages our broad network of channel partners, including distributors, value-added resellers, system integrators, leading communications services providers, and retailers. We manufacture our products through an outsourced model optimized for quality, reliability, and fulfillment agility.

We believe important drivers for the adoption of collaboration solutions include:

· UC&C solutions, including voice and video offerings, as a preferred method of communication,

· increasing presence of video on desktop and laptop devices,

· growth of video-capable mobile devices (including tablets and smartphones),

· growth of Microsoft Lync in the corporate environment and the resulting impact on sales of Polycom's Lync-compactible voice and video devices,

· expansion of business applications with integrated web-based video and content collaboration,

· virtualization and the move to private, public, and hybrid clouds,

· adoption of UC&C by small and medium businesses,

· growth of the number of teleworkers globally,

· new pricing models and options for video delivery, including subscription-based software pricing and as-a-service offerings,

· emergence of Bring Your Own Device (BYOD) programs in businesses of all sizes, across all regions,

· demand for UC&C solutions for business-to-business and business-to-consumer communications and the move of consumer applications into the business space, and

· continued commitment by organizations and individuals to reduce their carbon footprint and expenses by choosing video collaboration over travel.


We believe we are uniquely positioned as the UC&C ecosystem partner of choice through our strategic partnerships, support of open standards, innovative technology, multiple delivery modes and customer-centric go-to-market capabilities.

Revenues for the three months ended March 31, 2014 were $328.5 million, a decrease of $10.2 million, or 3%, from the same period in 2013. On a year-over-year basis, our total product revenues declined while service revenues increased. The overall decrease in product revenues was primarily a result of lower sales of our UC group systems, mainly driven by lower IP conference phone revenues as a result of Cisco Systems, Inc. ("Cisco") no longer selling a product they previously purchased from us, and, to a lesser extent, due to lower UC platform products revenues. The decreases were partially offset by increased revenues from our UC personal devices products. Our product revenues have decreased year-over-year since the first quarter of 2012, driven by lower UC group systems revenues, primarily group video products in our Americas segment. We expect this trend to continue at least in the near term. The increase in service revenues was driven primarily by increased maintenance revenues on a larger installed base and increased maintenance service renewals year-over-year as a result of ongoing efforts to increase maintenance service renewal rates.

From a segment perspective, our Americas, EMEA, and APAC segment revenues accounted for 50%, 27%, and 23%, respectively, of our revenues in the three months ended March 31, 2014. Our Americas and APAC segment revenues decreased by 5% and 3%, respectively, and our EMEA segment revenues remained relatively flat in the three months ended March 31, 2014 as compared to the same period in 2013. On a year-over-year basis, product revenues declined and service revenues increased across all our segments. See Note 16 of Notes to Condensed Consolidated Financial Statements for further information on our segments, including a summary of our segment revenues, segment contribution margins and segment gross accounts receivable. The discussion of results of operations at the consolidated level is also followed by a discussion of results of operations by segment for the three months ended March 31, 2014 and 2013.

Operating margins decreased by 2 percentage points in the three months ended March 31, 2014 as compared to the same period in 2013. The decrease in operating margins was primarily driven by the restructuring costs associated with headcount and facilities actions taken during the quarter, and to a lesser extent, lower gross margins, offset in part by a decrease in sales and marketing and research and development expenses. Operating expenses and cost of revenues were favorably impacted in the quarter by lower stock-based compensation expense due to forfeitures related to the restructuring actions taken during the quarter and the effect of the change in our forfeiture rate. Excluding restructuring costs, operating expenses decreased as a percentage of revenues by 6%, primarily as a result of our focus on improving operating margins. Gross margins decreased by less than 1 percentage point in the three months ended March 31, 2014 as compared to the same period in 2013, primarily as a result of lower revenues and changes in product mix toward lower margin UC personal devices products in the three months ended March 31, 2014 as compared to the same period in 2013. Operating expenses as a percentage of revenues increased by 1 percentage point year-over-year, primarily due to higher restructuring charges, partially offset by decreased headcount-related costs and transaction-related costs.

During the three months ended March 31, 2014, we generated approximately $19.1 million in cash flow from operating activities, which after the impact of investing and financing activities described in further detail under "Liquidity and Capital Resources," resulted in a $12.4 million net decrease in our total cash and cash equivalents.


Results of Operations for the Three Months Ended March 31, 2014 and 2013

The following table sets forth, as a percentage of revenues (unless indicated
otherwise), condensed consolidated statements of operations data for the periods
indicated:



                                                                Three Months Ended
                                                        March 31,               March 31,
                                                          2014                     2013
Revenues:
Product revenues                                                  70 %                     73 %
Service revenues                                                  30 %                     27 %
Total revenues                                                   100 %                    100 %
Cost of revenues:
Cost of product revenues as a % of product revenues               42 %                     41 %
Cost of service revenues as a % of service revenues               40 %                     41 %
Total cost of revenues                                            42 %                     41 %
Gross profit                                                      58 %                     59 %
Operating expenses:
Sales and marketing                                               28 %                     32 %
Research and development                                          15 %                     16 %
General and administrative                                         7 %                      7 %
Amortization of purchased intangibles                              1 %                      1 %
Restructuring costs                                                9 %                      2 %
Transaction-related costs                                          0 %                      1 %
Total operating expenses                                          60 %                     59 %
Operating loss                                                    (2 )%                    (0 )%
Interest and other income (expense), net:
Interest expense                                                  (0 )%                    (0 )%
Other income (expense)                                            (0 )%                    (0 )%
Interest and other income (expense), net                          (0 )%                    (0 )%
Loss from continuing operations before benefit from
income taxes                                                      (2 )%                    (0 )%
Benefit from income taxes                                         (1 )%                    (1 )%
Net income (loss) from continuing operations                      (1 )%                     1 %
Gain from sale of discontinued operations, net of
taxes                                                              0 %                      0 %
Net income (loss)                                                 (1 )%                     1 %

Revenues

We manage our business primarily on a geographic basis, organized into three
geographic segments. Our revenues, which include product and service revenues,
for each segment are summarized for the periods indicated in the following
table:



                                    Three Months Ended
                                 March 31,      March 31,
                $ in thousands      2014           2013         Decrease
                Americas         $  163,070     $  170,981             (5 )%
                % of revenues            50 %           51 %
                EMEA             $   89,036     $   89,092              -
                % of revenues            27 %           26 %
                APAC             $   76,418     $   78,679             (3 )%
                % of revenues            23 %           23 %
                Total revenues   $  328,524     $  338,752             (3 )%

The decrease in total revenues was due to a decrease in product revenues of $14.6 million, or 6%, partially offset by an increase in service revenues of $4.4 million, or 5%, in the three months ended March 31, 2014 as compared to the same period in 2013. The decrease in product revenues was primarily a result of lower sales of our UC group systems and UC platform products, partially offset by increased sales of our UC personal devices products year-over-year. The increase in service revenues was primarily driven by increased maintenance service revenues on a larger installed base and increased maintenance service renewals year-over-year.


The overall decreases in the Americas and APAC segment revenues in the three months ended March 31, 2014 was driven primarily by decreased revenues across many of our key geographic markets, including the United States, Japan, China, and Brazil, partially offset by increases in Canada and Mexico. EMEA segment revenues in the three months ended March 31, 2014 remained relatively flat compared to the same period in 2013 primarily due to growth in the United Kingdom and Central Europe, partially offset by a decrease in the Nordic countries. On a year-over-year basis, our product revenues decreased and service revenues increased across all our segments during the three months ended March 31, 2014.

In 2013, Cisco informed us that it would end of life, and will therefore no longer resell, the IP conference phones they purchase from us. In the three months ended March 31, 2014, we generated approximately $2.5 million in revenues from this relationship, a decrease of approximately $9.0 million from the same period in 2013. We do not expect any further revenues from this relationship in 2014. The decrease in the revenues of these IP conference phones as a result of this change accounted for the majority of our year-over-year product revenue decrease in the three months ended March 31, 2014. We have been planning for the transition and are working to evolve the features and functionality of our VoIP conference phone portfolio to be interoperable in a Cisco environment.

In the three months ended March 31, 2014 and 2013, one channel partner, ScanSource Communications ("ScanSource"), located in our Americas segment, accounted for 18% and 17% of our total revenues, respectively. We believe it is unlikely that the loss of any of our channel partners would have a long term material adverse effect on our consolidated revenues or segment revenues as we believe end-users would likely purchase our products from a different channel partner. However, a loss of any one of these channel partners could have a short-term material adverse impact.

In addition to the primary view on a geographic basis, we also track revenues by groups of similar products and services for various purposes. The following table presents revenues for groups of similar products and services for the periods indicated:

                                     Three Months Ended
                                  March 31,      March 31,        Increase
            $ in thousands           2014           2013         (Decrease)
            UC group systems      $  213,372     $  232,426               (8 )%
            UC personal devices       56,474         49,246               15 %
            UC platform               58,678         57,080                3 %
            Total revenues        $  328,524     $  338,752               (3 )%

UC group systems include all immersive telepresence, group video and group voice systems products and the related service elements. The decrease in UC group systems revenues was primarily driven by decreases in sales of our group voice products and related services from our Americas segment and, to a lesser extent, decreases in sales of our group video products and related services from our Americas and APAC segments and decreased sales of immersive telepresence products and related services in our Americas and EMEA segments, partially offset by increased revenues from group voice products and related services from our EMEA segment.

UC personal devices include desktop video devices and desktop voice products and the related service elements. The increase in UC personal devices revenues was primarily due to increased sales of our desktop voice products and related services in our Americas segment, partially offset by decreased revenues from desktop video products and related services in our Americas and EMEA segments and decreased revenues from desktop voice products and related services in our APAC segment. Overall, the increase in UC personal devices revenues was due in part to increased demand for our Microsoft® Lync® interoperable solutions and the continued adoption of VoIP technologies.

UC platform includes our RealPresence Platform hardware and software products and the related service elements. The increase in UC platform revenue was driven by increased sales of our UC platform products and related services in our Americas segment, partially offset by decreased revenues from our EMEA and APAC segment.


Cost of Revenues and Gross Margins



                                        Three Months Ended
                                     March 31,      March 31,        Increase
               $ in thousands           2014           2013         (Decrease)
          Product Cost of Revenues   $   97,636     $  101,878               (4 )%
          % of Product Revenues              42 %           41 %           1 pt
          Product Gross Margins              58 %           59 %         (1) pt
          Service Cost of Revenues   $   38,903     $   37,777                3 %
          % of Service Revenues              40 %           41 %         (1) pt
          Service Gross Margins              60 %           59 %           1 pt
          Total Cost of Revenues     $  136,539     $  139,655               (2 )%
          % of Total Revenues                42 %           41 %           1 pt
          Total Gross Margins                58 %           59 %         (1) pt

Cost of Product Revenues and Product Gross Margins

Cost of product revenues consists primarily of contract manufacturer costs, including material and direct labor, our manufacturing organization, tooling depreciation, warranty expense, freight expense, royalty payments, amortization of certain intangible assets, stock-based compensation costs and an allocation of overhead expenses, including facilities and IT costs. Cost of product revenues and product gross margins included charges for stock-based compensation of $0.6 million and $0.9 million for the three months ended March 31, 2014 and 2013, respectively. Cost of product revenues at the segment level consists of the standard cost of product revenues and does not include items such as warranty expense, royalties, and the allocation of overhead expenses, including facilities and IT costs, as well as stock-based compensation costs and amortization of purchased intangible assets.

The overall decrease in product gross margins was primarily due to lower product sales and changes in product mix resulting in increased revenues related to UC personal devices which has lower margins than our UC group systems and UC platform products. From a segment perspective, product gross margins decreased in our EMEA and APAC segments but increased in our Americas segment in the three months ended March 31, 2014 as compared to the same period in 2013.

Cost of Service Revenues and Service Gross Margins

Cost of service revenues consists primarily of material and direct labor, including stock-based compensation costs, depreciation, and an allocation of overhead expenses, including facilities and IT costs. Cost of service revenues and service gross margins included charges for stock-based compensation expense of $1.0 million and $1.5 million for the three months ended March 31, 2014 and 2013, respectively. Cost of service revenues at the segment level consists of the standard cost of service revenues and does not include items such as warranty expense, royalties, and the allocation of overhead expenses, including facilities and IT costs, as well as stock-based compensation costs and amortization of purchased intangible assets.

Overall, service gross margins increased slightly primarily due to increased service revenues. The increase was partially offset by increased cost of services primarily driven by higher compensation costs, outside services, and IT and facilities allocations. On a year-over-year basis, service gross margins as a percentage of revenues increased across all our segments.

Total Cost of Revenues and Total Gross Margins

Overall, the decrease in total gross margin as a percentage of revenues was driven primarily by the decrease in the product gross margins, as discussed under Cost of Product Revenues and Product Gross Margins, which was primarily offset by a slight increase in service gross margins, as discussed under Cost of Service Revenues and Service Gross Margins.


We expect gross margins to remain relatively flat in the near term. Forecasting future gross margin percentages is difficult, and there are a number of risks related to our ability to maintain or improve our current gross margin levels. Our cost of revenues as a percentage of revenues can vary significantly based upon a number of factors such as the following: uncertainties surrounding revenue levels, including future pricing and/or potential discounts as a result of the economy or in response to the strengthening of the U.S. dollar in our international markets, and related production level variances; competition; the extent to which new services sales accompany our product sales as well as maintenance renewal rates; changes in technology; changes in product mix; variability of stock-based compensation costs; royalties to third parties; utilization of our professional services personnel as we develop our professional services practice and as we make investments to expand our professional services offerings; increasing costs for freight and repair costs; our ability to achieve greater efficiencies in the installations of our immersive telepresence products; manufacturing efficiencies of subcontractors; manufacturing and purchase price variances; higher prices on commodity components; warranty and recall costs; and the timing of sales.

Sales and Marketing Expenses



                                    Three Months Ended
                                 March 31,      March 31,
                $ in thousands      2014           2013        Decrease
                Expenses         $   93,968     $  108,715           (14 )%
                % of Revenues            28 %           32 %     (4) pts

Sales and marketing expenses consist primarily of salaries and commissions for our sales force, including stock-based compensation costs, advertising and promotional expenses, product marketing expenses, and an allocation of overhead expenses, including facilities and IT costs. Sales and marketing expenses, except for direct sales and marketing expenses, are not allocated to our segments. Sales and marketing expenses included charges for stock-based compensation expense of $0.4 million and $6.6 million for the three months ended March 31, 2014 and 2013, respectively.

The year-over-year decrease in sales and marketing expenses was primarily due to decreased headcount-related costs, including compensation expense and stock-based compensation cost, and lower headcount-based allocations, marketing program spending and travel and entertainment. Sales and marketing headcount decreased by 9% from March 31, 2013 to March 14, 2014 in order to better align costs with revenues.

We expect our sales and marketing expenses to increase in absolute dollars in the near term primarily due to increased stock-based compensation expense. Expenses will also fluctuate depending on revenue levels achieved as certain expenses, such as commissions, are determined based upon the revenues achieved. Forecasting sales and marketing expenses as a percentage of revenues is highly dependent on expected revenue levels and could vary significantly depending on actual revenues achieved in any given quarter. Marketing expenses will also fluctuate depending upon the timing and extent of marketing programs as we market new products. Sales and marketing expenses may also fluctuate due to increased international expenses and the impact of changes in foreign currency exchange rates.

Research and Development Expenses



                                     Three Months Ended
                                 March 31,       March 31,
                $ in thousands      2014           2013         Decrease
                Expenses         $   48,147     $    55,935           (14 )%
                % of Revenues            15 %            16 %      (1) pt

Research and development costs are expensed as incurred and consist primarily of compensation costs, including stock-based compensation costs, outside services, expensed materials, depreciation and an allocation of overhead expenses, including facilities and IT costs. Research and development costs are not allocated to our segments. Research and development expenses included charges for stock-based compensation expense of $1.0 million and $4.7 million for the three months ended March 31, 2014 and 2013, respectively.

The year-over-year decreases in research and development expenses were primarily due to decreased compensation expense, including lower stock-based compensation expense and the capitalization of certain internal costs related to internally developed software products, as well as lower program spending.


We believe that innovation and technological leadership is critical to our future success, and we are committed to continuing a significant level of research and development to develop new technologies and products to combat competitive pressures. We are also investing more heavily in research and development as a result of increased business opportunities with strategic partners and service provider customers as a result of our key strategic initiatives in these areas. We expect that research and development expenses in absolute dollars will remain flat or increase slightly in the near term but will fluctuate depending on the timing and number of development activities in any given quarter. Research and development expenses as a percentage of revenues are highly dependent on expected revenue levels and could vary significantly depending on actual revenues achieved in any given quarter.

General and Administrative Expenses



                                     Three Months Ended
                                 March 31,       March 31,       Increase
                $ in thousands      2014           2013         (Decrease)
. . .
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