Description
Polycom Inc. Director D SCOTT MERCER bought 25,000 shares on 8-23-2012 at $ 9.51
BUSINESS OVERVIEW
GENERAL
We are a global leader in standards-based unified communications (“UC”) solutions and a leading provider of telepresence, video, voice and infrastructure solutions based on open standards. With Polycom ® RealPresence™ video and voice solutions, from infrastructure to endpoints, people all over the world can collaborate face-to-face without being in the same physical location. Individuals and teams can connect, solve, decide, and create through a high-definition visual experience from their desktops, meeting rooms, classrooms, mobile devices, web browsers, and specialized solutions such as video carts for bedside conferences in hospitals between patients and remote physicians. 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, Polycom enables 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.
Our vision is to make video collaboration ubiquitous. Toward this end, our strategy is to make video and voice collaboration simple to use and available to everyone through open, standards-based software—delivered on-premises or from the cloud—that connects people securely across any network, protocol, application or device they want to use. Historically, our focus has been premises-based solutions for the enterprise and public sector, targeted at vertical markets including finance, manufacturing, government, education and healthcare, and this continues to be a high-growth market opportunity for us as recognition of the mission-critical business benefits of video collaboration in the enterprise continues to grow. In addition, in response to emerging market trends, and the network effect driven by business-to-business adoption of UC, we are extending our focus designed to capture opportunities within emerging markets including mobile, social and cloud-based delivery for enterprise and small and medium businesses (SMBs).
Cloud-Based UC Solutions
Our first strategic imperative is enabling cloud-based UC solutions. Polycom’s cloud strategy is to partner with qualified service providers and channel partners to deliver Video-as-a-Service (“VaaS”) offerings to enterprises and SMBs. As part of our cloud strategy, we announced Polycom RealPresence Cloud in January 2012—a wholesale VaaS offering for qualified service providers and channel partners. RealPresence Cloud is powered by the Polycom RealPresence Platform and leverages the Polycom RealPresence Network (formerly the Halo/HVEN network, acquired from Hewlett-Packard Company (“HP”) in 2011) to allow service providers to fast-track their capability to deliver video from the cloud. In addition, we are a founding member of the Open Visual Communications Consortium TM (“OVCC TM” ), an open business-to-business exchange consortium that leverages a global consortium of network and managed service providers to deliver broad and robust connectivity services for unified communications. This will include integrated directory services and presence capability for enterprises, SMBs, and consumers alike. Our solution is built with an open-standards approach to assure broad interoperability, enabling standards-based devices to facilitate HD video and voice UC meetings in point-to-point or multipoint settings.
Mobile UC Solutions
Our second strategic imperative is delivering Mobile UC solutions. Our objective is to deliver enterprise-grade video collaboration and content sharing on a wide variety of mobile devices leveraging our leadership in premises-based video and voice communications. In October 2011, Polycom took video mobile, delivering enterprise-grade video collaboration to mobile users. Polycom RealPresence Mobile, a new, free-to-download software solution, extends Polycom’s HD video collaboration technology, built on the Polycom RealPresence Platform, beyond the office and conference room to Apple ® iPad ® 2, Motorola Droid Xyboard and Samsung Galaxy Tab™ tablets. This should drive a significant network effect for users and businesses by enabling mobile devices to connect with each other as well as other standards-based telepresence and video systems and applications. We expect our UC mobility solutions to be deployed on a broad range of networks including 3G, 4G, WiFi, and DECT for both wide area anywhere/anytime video collaboration. In addition, we have a broad portfolio of Wi-Fi and DECT wireless voice solutions that address the demand for on-premises mobility from small businesses to enterprises and in vertical market segments such as healthcare, large retail, manufacturing, and high-end hospitality.
Focused Ecosystem Partnerships
Our third strategic imperative is leveraging our focused ecosystem partners. The Polycom ® Open Collaboration Network™ is a powerful ecosystem of technology leaders, with whom we are working together to develop tailored, flexible, and future-ready solutions. Our open-standards integration with the leading UC and networking platform vendors makes it possible for customers to use our solutions along with their existing business applications to communicate in real time over multiple devices and across most networks.
Although we will continue to work closely with all or Polycom Open Collaboration Network partners, in 2012 we intend to focus our strategic investments, including sales and program resources, on extending our relationships with Microsoft Corporation, International Business Machines Corporation (“IBM”), HP and Apple Inc. In 2011, we continued to build our strategic relationships with these key partners. We offer more than 40 solutions that are interoperable with Microsoft Lync, moving us toward our goal of delivering video potentially to hundreds of millions of Microsoft desktops. In July, Polycom was recognized as the 2011 UC Innovations Partner of the Year at the Microsoft Partner Conference in Los Angeles. Our strategic alliance with HP continues to develop as Polycom acquired HP’s Visual Collaboration business. Further, Polycom is an exclusive partner to HP for telepresence and certain UC solutions for resale and internal deployments at HP. The IBM alliance has expanded to include not only our solution integration with IBM Sametime and social business applications, but to also encompass our work with IBM Global Technology Services. Our alliances and integration with the larger UC ecosystem are critical to providing customers the flexibility, innovation, and investment protection they require.
As part of our UC Cloud and UC Mobility strategies, we also expect to work more closely with service providers such as AT&T Inc., BT Group plc, China Unicom Limited, Telstra Corporation Limited and Verizon Communications Inc. to deploy new unified communications services that enable consumers and enterprises to participate in both point-to-point and multi-point telepresence conversations over their service provider’s network. These solutions will include integrated feature-rich mobile clients, standards-based architecture, and the Polycom RealPresence Platform. We believe this solution set and open-standards approach will operate effectively with service provider networks to enable cloud-based UC delivery to enterprises and SMBs, whereas most other offerings have limited interoperability and only point-to-point capabilities.
RealPresence Platform
Our fourth strategic imperative is the delivery and proliferation of the Polycom RealPresence Platform. Polycom introduced the RealPresence Platform, a comprehensive software infrastructure for universal video collaboration, powering Polycom’s HD telepresence and video solutions, in September 2011. Through its open-standards approach, the platform ensures interoperability with hundreds of unified communications and social networking applications; interoperates with core networking and security infrastructure to deliver secure collaboration across heterogeneous networks with up to 50% less bandwidth consumption than other solutions; and provides security, reliability, management, and scalability to support video as a cloud-based service to enterprises, SMBs and consumers. The functional modules of the RealPresence Platform include: Universal Video Collaboration, Video Resource Management, Virtualization Management, Universal Access and Security and Video Content Management. Key to Polycom’s software platform strategy is integration with partner products in the areas of instant messaging/presence, call control, web conferencing, video collaboration, mobile, social media, networking, and security.
Growth Markets
Our fifth and final strategic imperative is to execute on the Growth Market opportunity. For Polycom, this opportunity specifically refers to the fast-growth geographies of the BRIC (Brazil, Russia, India, and China) nations, the Middle-East, rest of Central America/Latin America and Africa and CIS countries. In 2011, these fast-growth geographies represented approximately 23% of our revenues and grew approximately 53% over 2010. Leveraging this growth, we believe that these markets represent significant growth opportunities for Polycom, and we are making significant investments in go-to-market and research and development resources to maximize our share of these important markets in 2012 and beyond.
Available Information
We were incorporated in December 1990 in Delaware. Our headquarters is located at 4750 Willow Road, Pleasanton, California, 94588. Our telephone number at this location is (925) 924-6000 and our web address is www.polycom.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports are available, free of charge, on our website under “Company > Investor Relations > SEC Filings,” as soon as reasonably practicable after such material is filed electronically with, or furnished to, the United States Securities and Exchange Commission, or SEC. Information on the website does not constitute a part of this Annual Report on Form 10-K. The SEC also maintains a website ( www.sec.gov ) that contains reports, proxy and information statements and other information regarding Polycom and our business that we file electronically with the SEC.
UC Group Systems
Our UC group systems offer customers a unified, end-to-end communication capability that enables geographically dispersed individuals to communicate as naturally as if they were in the same room. Through our UC solutions, people can connect and collaborate with one another whether they are in a board room, meeting room, classroom, at their desk, while mobile, or through web-based social business applications.
The Polycom ® RealPresenceExperience (“RPX™”) room environment, Polycom ® Halo Collaboration Studio™, Polycom Open Telepresence Experience™ (“OTX™”) suite, Polycom ® Architected Telepresence Experience™ (“ATX ™” ) solution, and Polycom ® HDX ® personal and room-based telepresence solutions comprise a portfolio of high-performance, cost-effective, and easy-to-use room and immersive telepresence and video conferencing systems. Multiple options exist to incorporate high-resolution data sharing and collaboration into a video conference. The Polycom ® People+Content™ family of peripherals allows users of Polycom HDX, Converged Management Application TM (“CMA ®” ) Desktop and Telepresence m100 products to more easily incorporate content, documents and audiovisual effects into their video conferencing sessions. The user experience for any Polycom HDX series or immersive telepresence customer is enhanced when users choose to deploy intelligent accessories, including the Polycom ® EagleEye Director, which changes the face of group video communications by enabling close-up views of every speaker in a video conference, regardless of their location or the number of people in the room, with automated and ‘directed’ camera pan, tilt and zoom, the Polycom ® UC Board TM , which seamlessly integrates white boarding into any telepresence meeting, and Polycom ® Touch Control, which eliminates the need for a remote control with a graphical touch interface simplifying content capture and sharing.
Polycom offers a range of UC group devices specifically optimized for the Microsoft Lync environment. The CX3000 IP Conference Phone is the only conference phone on the market that is optimized for Microsoft Lync and features embedded Microsoft Lync software, delivering a familiar user interface and functionality for conference call participants. The Polycom CX5000 Unified Conference Station adds a one-of-a kind 360 degree group video collaboration experience to Microsoft Lync environments. The CX7000 Unified Collaboration System is the only group voice, video, and content collaboration system optimized specifically for Microsoft Lync. Polycom now offers more than 40 Polycom solutions that natively integrate with Microsoft Lync, so Microsoft users can click a name on a Lync contact list and instantly be collaborating face-to-face via Polycom RealPresence video. The Polycom RealPresence Platform enables customers with Microsoft Lync clients, Polycom certified Lync products and/or Polycom endpoints to all connect together in multi-point calls.
Complementing Polycom’s telepresence and desktop video offerings, we provide conference phones that either integrate with our video solutions or can be used independently to conduct high-quality, effective voice conference calls. The product line consists of Polycom ® VoiceStation ® products for smaller rooms, Polycom ® SoundStation ® conference phones for midsize rooms, and Polycom ® SoundStation ® IP products for conference room solutions using Voice-over IP (“VoIP”) telephony networks. Polycom ® SoundStation Duo TM is an analog/IP hybrid conference phone for mid-size conference rooms for companies of all sizes that is ideal for organizations that are planning the transition to IP and looking to invest today in a future-ready solution.
UC Personal Devices
Our UC personal devices extend clear, HD voice, video, and content to desktops, home offices, mobile users, and branch sites, among other examples.
Our personal telepresence solutions allow organizations to leverage the power of visual communication among an expanded set of users and use cases. The Polycom HDX 4000 Series delivers a premier personal telepresence experience, with HD video, voice, and content-sharing housed in a compact and stylish design. The Polycom Telepresence m100 brings simple, effective, standards-based desktop conferencing to any PC and can be purchased as individual licenses. In addition, as part of our RealPresence Platform and Network Infrastructure product line, the Polycom CMA Desktop client is also a standards-based desktop video conferencing solution, supporting both PCs and MACs, that is centrally deployed via the Polycom CMA resource management solution.
The Polycom ® VVX ® 1500 business media phone combines advanced telephony, one-touch video, and integrated business applications into a life-like experience. This UC device is equipped with all of the capabilities of a full-featured Polycom ® SoundPoint ® IP conference phone, including six lines, Polycom ® HD Voice™ technology, a Gigabit Ethernet switch that supports Power over Ethernet (“PoE”), and a host of rich telephony functions. These features can be accessed via the buttons on the front of the phone or by simply touching the large color display. We also offer the VVX 500 business media phone, a mid-range business media phone that brings a smartphone-style touch-screen interface to the desktop. The VVX 500 features 12 line appearances, Microsoft Outlook and Calendar integration, web-based provisioning, USB expansion ports and an open application development environment to allow third-party development of interoperable applications.
The Polycom SoundPoint series of standards-based SIP desktop devices provides superior audio quality and rich features to address the desktop communications requirements of businesses. The complete SoundPoint product line is based on a common software architecture to ensure compatibility for all devices with our VoIP solution partners. The VoIP ecosystem includes call management suppliers for on-premises call servers and soft-switches for network-based call server platforms. Through our VoIP Interoperability Partner (“VIP”) program, we have established relationships with approximately 45 technology partners for VoIP call managers to collaborate in the development, marketing, and distribution of Polycom’s VoIP products.
Our wireless products address the demand for on-premises mobility and increased productivity from small businesses to enterprises and in vertical market segments such as healthcare, large retail, manufacturing, and high-end hospitality. We offer three wireless product lines, including the Polycom ® SpectraLink ® Wi-Fi, Polycom SpectraLink Proprietary, and Polycom ® KIRK ® DECT phone offerings. These mobility products are sold through channel partners and are also provided through original equipment manufacturer (“OEM”) partners and specialized system integrators.
In addition, with Microsoft we jointly developed a family of devices that are optimized for use with Microsoft Lync. These natively integrated UC devices deliver rich presence, HD voice, and plug-and-play functionality, and in conjunction with the Lync solution, provide an attractive value proposition for private branch exchange (“PBX”) replacement. Further, a wide range of USB and IP devices deliver the full Microsoft UC experience and are easy to deploy, use, and manage. Our standards-based SIP voice solutions are also now interoperable with Microsoft Lync, providing greater choice and flexibility to customers as they update or transition their call management solutions.
Standards and Interoperability
Polycom has a philosophy and long history of developing standards-based interoperable products. We promote the development and deployment of open standards because we believe this is an effective way to establish broad interoperability in the complex multi-vendor ecosystem of unified communications. This approach not only provides a broad “network effect” of connectivity, but also provides our customers with the flexibility to choose best-in-breed solutions that work together. Our goal is to make video and voice collaboration simple to use and available to everyone through open, standards-based software—delivered on-premises or from the cloud—that connects people securely across any network, protocol, application or device they want to use.
We actively participate in several standards development organizations (including the IEEE, IETF, and the ITU-T) in order to develop new open standards for the industry (such as standards for telepresence, content sharing and high definition audio). We also have joined with both partners and competitors in many industry forums and consortiums that focus on interoperability, including the IMTC (International Multimedia Teleconferencing Consortium), OVCC (Open Visual Communications Consortium), SIP Forum (Session Initiated Protocol), UCIF (Unified Communications Interoperability Forum) and the Wi-Fi Alliance. We are founding members or board members of several of these organizations and are active in leading the development of future standards and protocols intended to drive interoperability and standards for the greater good of the industry and our customers.
CEO BACKGROUND
Andrew M. Miller has been a director of Polycom since June 2010. Mr. Miller has served as Polycom’s President and Chief Executive Officer since May 2010. He also served as Polycom’s Executive Vice President of Global Field Operations from July 2009 to May 2010. Prior to joining Polycom, Mr. Miller served as global president of IPC Information Systems, LLC, a trading technology and network connectivity provider, from December 2007 to June 2009. Prior to his position with IPC, Mr. Miller joined Monster Worldwide Inc., a provider of global online employment solutions, as Senior Vice President, Monster North America, from June 2006 to August 2007. Mr. Miller served as Chief Executive Officer of Tandberg asa, a video solutions provider, from January 2002 to June 2006. Mr. Miller also held a number of roles at Cisco Systems, Inc. from 1990 to 2001, including Vice President, US Area Sales (West) and Vice President, Marketing (Customer Advocacy). Mr. Miller has served on the board of directors of Bridgepoint Education, Inc. since February 2012 and served on the board of directors of BroadSoft, Inc. from June 2006 to October 2010. Mr. Miller holds a B.S. in Business Administration from the University of South Carolina.
Qualifications to serve as director: Mr. Miller is uniquely qualified to contribute to Polycom’s future delivery on its strategic initiatives through his experience as a 30-year technology industry and sales veteran with deep knowledge of strategic and operational issues within the technology industry and a breadth of direct, industry-specific experience as the former chief executive officer of Tandberg and having served in other notable technology leadership roles, including at Cisco Systems and IPC Information Systems. During his career, Mr. Miller has developed a strong track record for driving growth at companies such as Cisco Systems and Tandberg, building customer relationships and leading world-class organizations. In addition, Mr. Miller has a comprehensive understanding of Polycom’s business, operations, competition and financial position.
Betsy S. Atkins has been a director of Polycom since April 1999. Ms. Atkins has served as the Chief Executive Officer of Baja LLC, an independent venture capital firm focused on technology, renewable energy and life sciences industries, since 1994. Ms. Atkins served as Chief Executive Officer and Chairman of the board of directors of Clear Standards, Inc., a provider of enterprise carbon management and sustainability solutions, from February 2009 until August 2009 when Clear Standards was acquired by SAP AG, a business software company. Previously, Ms. Atkins served as Chairman and Chief Executive Officer of NCI, Inc., a functional food/nutraceutical company, from 1991 through 1993. Ms. Atkins was a co-founder of Ascend Communications, Inc. in 1989 and a member of its board of directors, and served as its EVP of sales, marketing, professional services and international operations prior to its acquisition by Lucent Technologies. Ms. Atkins served on the boards of directors of Vonage Holdings Inc. from July 2005 to March 2007, Towers Watson & Co. from January 2010 to November 2010 and Reynolds American Inc. from July 2004 to June 2010, and has served on the boards of directors of SunPower Corporation since October 2005, Chico’s FAS, Inc. since January 2004, and Schneider Electric, SA since April 2011, as well as the boards of a number of private companies. Ms. Atkins is also an advisor to SAP, was formerly an advisor to British Telecom and was a presidential-appointee to the Pension Benefit Guaranty Corporation advisory committee. Ms. Atkins holds a B.A. from the University of Massachusetts.
Qualifications to serve as director: Ms. Atkins is independent and has deep expertise in many areas, including senior management and operational experience in the telecommunications industry. As a co-founder and Executive Vice President of Ascend Communications and formerly as an advisor to British Telecom, Ms. Atkins has a strong skill set in sales, marketing and international operations in the telecommunications industry and extensive knowledge of its principal customer segments. In addition, Ms. Atkins has significant public board experience, including large, multi-national enterprises, as well as service as a director of The NASDAQ Stock Market LLC and as a former appointee to the Pension Benefit Guaranty corporation advisory committee, which gives her broad experience and thought leadership in corporate governance matters generally, including executive compensation, and evolving best practices in corporate governance. Ms. Atkins currently chairs Polycom’s Compensation Committee and serves on the Corporate Governance and Nominating Committee. Ms. Atkins previously served as Lead Independent Director from May 2003 to February 2006.
David G. DeWalt has been a director of Polycom since November 2005. In May 2010, Mr. DeWalt was named Chairman of the Board of Directors. Mr. DeWalt served as President, Chief Executive Officer and director of McAfee, Inc., a provider of antivirus software and intrusion prevention solutions, from April 2007 until February 2011 when McAfee was acquired by Intel Corporation, a maker of semiconductor chips. Mr. DeWalt served as President of McAfee, a wholly-owned subsidiary of Intel, from February 2011 to July 2011. From December 2003 to March 2007, Mr. DeWalt held various positions at EMC Corporation, a developer and provider of information infrastructure technology and solutions, including as Executive Vice President, EMC Software Group, and the President of EMC’s Documentum and Legato Software divisions. Prior to joining EMC, Mr. DeWalt served as President and Chief Executive Officer of Documentum, Inc. from July 2001 to December 2003, Executive Vice President and Chief Operating Officer of Documentum from October 2000 to July 2001, and Executive Vice President and General Manager, eBusiness Unit, of Documentum from August 1999 to October 2000. Prior to joining Documentum in 1999, Mr. DeWalt was the founding principal and Vice President of Eventus Software from August 1997 to December 1998. Following the 1998 acquisition of Eventus by Segue, Inc. Software, Mr. DeWalt served as Segue’s Vice President, North American sales. Mr. DeWalt has served on the board of directors of Delta Air Lines since November 2011 and Jive Software since March 2011. Mr. DeWalt holds a B.S. in Computer Science and Electrical Engineering from The University of Delaware.
Qualifications to serve as director : Mr. DeWalt is independent and has extensive senior management expertise in the technology industry, including previously as chief executive officer of McAfee, Inc., as Executive Vice President, EMC Software Group, of EMC Corporation and as President of McAfee, a wholly-owned subsidiary of Intel Corporation. Mr. DeWalt’s strategic and operational experience as a senior executive officer of a Fortune 500 company and recently as CEO of McAfee is directly relevant to strategic and operational issues faced by Polycom, including strategic positioning, go-to-market initiatives, international operations, strategic partnerships and mergers and acquisitions. In addition, Mr. DeWalt has a comprehensive understanding of the technology industry generally and of the prevailing industry trends, including industry consolidation. Mr. DeWalt is a member of Polycom’s Compensation Committee (and served as Chair from February 2006 to May 2008) and previously served as Lead Independent Director from May 2008 to May 2010. Mr. DeWalt currently serves as Polycom’s Chairman of the Board.
John A. Kelley, Jr. has been a director of Polycom since March 2000. Mr. Kelley has served as the Chief Executive Officer of CereScan Corp., a provider of high-definition functional brain imaging, since July 2009 and as Chairman of the board of directors of CereScan since March 2009. Previously, Mr. Kelley served as the Chairman, President and Chief Executive Officer of McDATA Corporation, a provider of storage networking and data infrastructure solutions until McDATA was acquired by Brocade Communications Systems, Inc., a data infrastructure company, in January 2007. Mr. Kelley started at McDATA as President and Chief Operating Officer in August 2001. Prior to joining McDATA, Mr. Kelley served as Executive Vice President of Networks at Qwest Communications International, Inc. from August 2000 to December 2000. He served as President of Wholesale Markets for U.S. West, Inc. from May 1998 to July 2000. From 1995 to April 1998, Mr. Kelley served as Vice President and General Manager of Large Business and Government Accounts and President of Federal Services for U.S. West. Prior to joining U.S. West, Mr. Kelley was the Area President for Mead Corporation’s Zellerbach Southwest Business Unit from 1991 to 1995, and held senior positions at Xerox Corporation and NBI, Inc. Mr. Kelley served on the board of directors of McData Corporation from August 2001 until McDATA was acquired in January 2007. Mr. Kelley is also a director of several private company and not-for-profit boards. Mr. Kelley holds a B.S. in business management from the University of Missouri, St. Louis.
Qualifications to serve as director : Mr. Kelley is independent and has broad experience, knowledge and expertise in the communications industry, including as chief executive officer of McDATA and in senior management positions at large telecommunications companies. Mr. Kelley’s strategic and operational experience as a senior executive officer and as chief executive officer in the telecommunications and networking industries is directly relevant to many of the strategic and operational issues faced by Polycom, including strategic planning, operations, finance, governance and industry consolidation. Mr. Kelley currently chairs Polycom’s Corporate Governance and Nominating Committee and is a member of the Audit Committee.
D. Scott Mercer has been a director of Polycom since November 2007. From April 2008 to April 2011, Mr. Mercer served as the Chief Executive Officer of Conexant Systems, Inc., a semiconductor solutions company that provides products for imaging, video, audio and Internet connectivity applications. Mr. Mercer also served on the board of directors of Conexant from May 2003 to April 2011 and served as Chairman of the board of directors of Conexant from August 2008 to April 2011. Mr. Mercer served as interim Chief Executive Officer of Adaptec, Inc., a provider of software and hardware-based storage solutions, from May 2005 through November 2005. Mr. Mercer also served as a senior vice president and advisor to the chief executive officer of Western Digital Corporation, a supplier of disk drives to the personal computer and consumer electronics industries, from February 2004 through December 2004. Prior to that, Mr. Mercer was a Senior Vice President and the Chief Financial Officer of Western Digital Corporation from October 2001 through January 2004. From June 2000 to September 2001, Mr. Mercer served as Vice President and Chief Financial Officer of Teralogic, Inc. From June 1996 to May 2000, Mr. Mercer held various senior operating and financial positions with Dell, Inc. In addition to Conexant, Mr. Mercer served on the boards of directors of Net Ratings, Inc. from January 2001 to June 2007, Adaptec, Inc. from November 2003 to October 2008, SMART Modular Technologies (WWH), Inc. from June 2007 to January 2009, and Palm, Inc. from June 2005 until July 2010 when Palm was acquired by Hewlett-Packard Company. Mr. Mercer has served as a director of QLogic Corp. since September 2010. He holds a B.S. in Accounting from California Polytechnic University.
Qualifications to serve as director : Mr. Mercer is independent and an audit committee financial expert, with significant senior management and operational experience over the last 28 years in a number of technology companies. Mr. Mercer’s experience as a senior executive officer, including as both chief executive officer and chief financial officer, of high growth technology companies gives him a strong skill set in planning, operations, compliance and finance matters. Further, Mr. Mercer has significant public board experience, which adds to his relevant knowledge and experience. Mr. Mercer serves on Polycom’s Audit Committee and Corporate Governance and Nominating Committee.
William A. Owens has been a director of Polycom since December 2005 and was previously a director of Polycom from August 1999 to May 2004. Mr. Owens presently serves as the Chairman of AEA Investors (Asia) since April 2006 and has served as Managing Director, Chairman and Chief Executive Officer of AEA Holdings Asia, a New York private equity company at various times during that period. Mr. Owens previously served as Vice Chairman, Chief Executive Officer and President of Nortel Networks Corporation, a global supplier of communications equipment, from May 2004 to November 2005. Prior to that, Mr. Owens served as Chairman and Chief Executive Officer of Teledesic LLC, a satellite communications company, from February 1999 to May 2004. During that same period, Mr. Owens also served as Chairman and Chief Executive Officer of Teledesic’s affiliated company, Teledesic Holdings Ltd. From 1996 to 1998, Mr. Owens was President, Chief Operating Officer and Vice Chairman of Science Applications International Corporation (SAIC). Mr. Owens was a career officer in the U.S. Navy where he served as commander of the U.S. Sixth Fleet in 1990 and 1991, and as senior military assistant to Secretaries of Defense Frank Carlucci and Dick Cheney. Mr. Owens’ military career culminated in his position as vice chairman of the Joint Chiefs of Staff where he had responsibility for the reorganization and restructuring of the armed forces in the post-Cold War era. Mr. Owens is widely recognized for bringing commercial high technology into the U.S. Department of Defense for military applications and as the architect of the Revolution in Military Affairs (RMA), an advanced systems technology approach to military operations. Mr. Owens is also a member of the board of directors of CenturyTel, Inc., Wipro Limited and several philanthropic and private company boards. Mr. Owens was a member of the board of directors of Daimler Chrysler AG from November 2003 until April 2009, Embarq Corporation from May 2006 to July 2009 and Nortel Networks Corporation from February 2002 to November 2005. Mr. Owens holds a B.A. in mathematics from the U.S. Naval Academy, Bachelor’s and Master’s degrees in politics, philosophy, and economics from Oxford University, and a Master’s degree in Management from George Washington University.
Qualifications to serve as director : Mr. Owens is independent and has extensive experience in the telecommunications industry following a distinguished military career, including as Vice Chairman of the Joint Chiefs of Staff. Mr. Owens has broad senior management and operational experience in the technology industry and at the highest levels in the military and government, where his responsibilities encompassed the reorganization and restructuring of the nation’s military. Mr. Owens brings a level of insight and experience to Polycom’s business and international operations that is unique. In addition, his past and current experience on the board of directors of very large international companies based in Europe and Asia, as well as his current position with AEA Holdings Asia where he devotes extensive time to business in Asia, provides directly relevant knowledge and insight to Polycom’s international operations and global strategies, particularly in the Asia-Pacific region. Mr. Owens was named to the National Association of Corporate Directors’ (NACD) 2011 Directorship 100. Mr. Owens serves on Polycom’s Compensation Committee, and served as Lead Independent Director from February 2006 to May 2008.
Kevin T. Parker has been a director of Polycom since January 2005. Mr. Parker has served as President and Chief Executive Officer of Deltek, Inc., a provider of enterprise software applications, since June 2005 and as Chairman of the board of directors of Deltek since April 2006. Prior to joining Deltek, Mr. Parker served as Co-President of PeopleSoft, Inc., an enterprise application software company, from October 2004 to December 2004, as Executive Vice President of Finance and Administration and Chief Financial Officer of PeopleSoft from January 2002 to October 2004, and as Senior Vice President and Chief Financial Officer of PeopleSoft from October 2000 to December 2001. Prior to joining PeopleSoft, Mr. Parker served as Senior Vice President and Chief Financial Officer from 1999 to 2000 at Aspect Communications Corporation, a customer relationship management software company. From 1996 to 1999, Mr. Parker was Senior Vice President of Finance and Administration at Fujitsu Computer Products of America. Mr. Parker also serves on a private company board. Mr. Parker holds a B.S. in Accounting from Clarkson University and sits on its board of trustees.
Qualifications to serve as director : Mr. Parker is independent, an audit committee financial expert, and a recognized technology industry leader with significant senior management and operational experience. Mr. Parker’s service as both a president and chief executive officer, as a chief financial officer and in other significant senior finance roles gives him a valuable perspective into the operations and management of a company. From such roles, Mr. Parker has crucial insight into the technology industry, technology trends, and industry consolidation. In addition to his business and financial acumen, Mr. Parker brings operational experience to Polycom from his oversight of administrative, human resources, legal, facilities and IT functions. Mr. Parker serves as the chairman of Polycom’s Audit Committee.
MANAGEMENT DISCUSSION FROM LATEST 10K
Overview
We are a global leader in standards-based unified communications (“UC”) solutions and a leading provider of telepresence, video, voice and infrastructure solutions based on open standards. With Polycom RealPresence video and voice solutions, from infrastructure to endpoints, people all over the world can collaborate face-to-face without being in the same physical location. Individuals and teams can connect, solve, decide, and create through a high-definition visual experience from their desktops, meeting rooms, classrooms, mobile devices, web browsers, and specialized solutions such as video carts for bedside conferences in hospitals between patients and remote physicians. 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, Polycom enables 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.
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 $2.8 million, $2.6 million, and $1.9 million for the years ended December 31, 2011, 2010, and 2009, 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.
Overall, product gross margins remained essentially flat in 2011 as compared to 2010 across all our segments. Overhead absorption costs and other cost of sales such as freight, warranty and royalties are not allocated to our segments.
Overall, product gross margins increased by 2 percentage points in 2010 as compared to 2009, due to higher sales volumes, better management of overhead costs and increased use of ocean freight in 2010 which lowered the cost of product revenues. Overhead absorption costs and other cost of sales such as freight, warranty and royalties are not allocated to our segments. Product gross margin remained flat in our Americas segment and decreased in both our EMEA and APAC segments. The decrease in EMEA segment gross margins was primarily due to foreign exchange fluctuations in British pounds. The decrease in APAC segment gross margins was primarily due to a shift in product mix and increased discounting.
Our December 31, 2011 finished goods inventory levels were lower than the December 31, 2010 levels and inventory turns increased from 4.8 turns at December 31, 2010 to 6.1 turns at December 31, 2011. The decrease in inventory and an increase in inventory turns reflect our ability to manage lead times in fulfilling orders. Inventory turns in the future may fluctuate depending on our ability to reduce lead times, as well as changes in product mix. Our inventory turns may also decrease in the future as a result of the flexibility required to respond to the increased demands of our growing business and the sustainability of the global economic recovery.
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. The majority of our services revenue is related to maintenance agreements on new product sales, as well as the renewal of existing maintenance agreements. Historically, services have had a lower gross margin than our product gross margins. Cost of service revenues and service gross margins included charges for stock-based compensation of $3.9 million, $3.9 million, and $2.8 million for the years ended December 31, 2011, 2010, and 2009, respectively.
Overall, service gross margins increased by 8 percentage points in 2011 over 2010. Services gross margins increased in all of our geographic segments primarily as a result of increased revenues from our maintenance services and decreased costs as a percentage of revenue associated with the delivery of services due to higher productivity of services employees, improvements in product quality and lower outside services. Our service gross margins generally experience some fluctuations due to various factors such as the timing of contract initiations in our renewals and the mix of service offerings.
Overall, service gross margins decreased by 2 percentage points in 2010 over 2009 primarily as a result of investments made to expand our professional services practice as well as an increase in the mix of professional services revenues as a percentage of our total services revenues. Generally, professional services have a lower overall gross margin than our maintenance services.
Total Cost of Revenues and Total Gross Margins
Overall, total gross margins as a percentage of revenues increased by 1 percentage point in 2011 as compared to 2010. The increase in total gross margins was driven primarily by increases in our services 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, as compared to 2011. 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 revenue 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; the potential of 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; warranty and recall costs and the timing of sales. In addition, we may experience higher prices on commodity components that are included in our products. In order to control expenses in any given quarter, we have taken actions to reduce costs such as imposing travel restrictions, postponing salary increases, requesting employees to use paid time off or implementing other cost control measures. Such actions may not be able to be implemented in a timely manner or may not be successful in completely offsetting the impact of lower-than-anticipated revenues.
General and administrative expenses consist primarily of compensation costs, including stock-based compensation costs, professional service fees, allocation of overhead expenses, including facilities and IT costs, and litigation costs. General and administrative expenses are not allocated to our segments. General and administrative expenses included charges for stock-based compensation of $15.7 million, $12.8 million, and $7.5 million for the years ended December 31, 2011, 2010, and 2009, respectively.
General and administrative expenses increased in absolute dollars, but decreased by 1 percentage point as a percentage of revenues in 2011, as compared to 2010. The primary driver of the increase in absolute dollars was related to the 14% increase in headcount and related increases in compensation and other headcount-related expenses, including increased overhead allocations. This increase was partially offset by decreased expenses for legal and outside services. Further, in 2010 we incurred severance, legal and other costs associated with our CEO transition in May 2010, which did not reoccur in 2011.
General and administrative expenses increased in absolute dollars and remained flat as a percentage of revenues in 2010, as compared to 2009. Primary drivers of the increase were related to increased stock-based compensation charges in 2010 over 2009 and severance, legal and other costs associated with the CEO transition that occurred in May 2010. General and administrative expenses also increased due to the reinstatement of annual merit increases and incentive programs in the third quarter of 2010. The remaining increase in general and administrative expenses in absolute dollars was primarily due to increased legal fees and other outside services, and to a lesser extent, increases in headcount and headcount-related expenses.
Significant future charges due to costs associated with litigation or uncollectability of our receivables could increase our general and administrative expenses and negatively affect our profitability in the quarter in which they are recorded. Additionally, predicting the timing of litigation and bad debt expense associated with uncollectible receivables is difficult. The increase in international revenues has resulted in longer credit terms and increased credit risk, which could result in an increased level of bad debt expense in the future. Future general and administrative expense increases or decreases in absolute dollars are difficult to predict due to the lack of visibility of certain costs, including legal costs associated with defending claims against us, as well as legal costs associated with asserting and enforcing our intellectual property portfolio and other factors.
We expect that our general and administrative expenses will increase in absolute dollar amounts in the near term, but could fluctuate as we make investments in enhancements to our financial and operating systems and other costs related to supporting a larger company, increased costs associated with regulatory requirements, and our continued investments in international regions. General and administrative expenses may also increase as a result of additional investments required to support our key strategic initiatives. In order to control expenses in any given quarter, we have taken actions to reduce costs such as imposing travel restrictions, postponing salary increases, requesting employees to use paid time off or implementing other cost control measures. Such actions may not be able to be implemented in a timely manner or may not be successful in completely offsetting the impact of lower than anticipated revenues.
Acquisition-related Costs
We expense all acquisition-related costs as incurred. These costs generally include outside services for legal and accounting fees, and other integration services. In addition, it includes the amortization of cash merger consideration over the vesting term related to the ViVu acquisition. We have spent and will continue to spend significant resources identifying and acquiring businesses. During 2011, we recorded $9.7 million of acquisition-related costs. These costs were primarily related to our acquisition of Accordent which closed on March 21, 2011, our acquisition of HPVC which closed on July 27, 2011, and our acquisition of ViVu which closed on October 14, 2011. No such activities occurred in 2010 and 2009. See Note 2 of Notes to Consolidated Financial Statements for further information.
Amortization of Purchased Intangibles
In 2011, 2010, and 2009, we recorded $9.8 million, $5.6 million, and $5.8 million, respectively, for amortization of purchased intangibles acquired in our acquisitions. In addition to the amounts recorded as operating expenses in 2011, 2010 and 2009, we recorded amortization totaling $11.9 million, $13.3 million, and $13.5 million, respectively, related to certain technology intangibles in cost of product revenues. The increase in 2011, as compared to 2010, is primarily due to the amortization of purchased intangibles acquired from Accordent in the first quarter of 2011, from HPVC in the third quarter of 2011, and from ViVu in the fourth quarter of 2011. Purchased intangible assets are being amortized to expense over their estimated useful lives, which range from several months to eight years.
The amortization of purchased intangibles in 2010 remained relatively consistent with that recorded in 2009, as there were no additions, impairments or changes to useful lives recognized during either 2010 or 2009 that would increase or decrease the amortization expense amount.
We evaluate our purchased intangibles for possible impairment on an ongoing basis. When impairment indicators exist, we perform an assessment to determine if the intangible asset has been impaired and to what extent. The assessment of purchased intangibles impairment is conducted by first estimating the undiscounted future cash flows to be generated from the use and eventual disposition of the purchased intangibles and comparing this amount with the carrying value of these assets. If the undiscounted cash flows are less than the carrying amounts, impairment exists, and future cash flows are discounted at an appropriate rate and compared to the carrying amounts of the purchased intangibles to determine the amount of the impairment. No impairment charges were recognized for all periods presented. At December 31, 2011 and 2010, the carrying value of our purchased intangibles was $78.9 million and $26.6 million, respectively. The increase in the purchased intangibles carrying value from December 31, 2010 to December 31, 2011 was due to the acquisitions completed during the year.
Restructuring Costs
In 2011, 2010, and 2009, we recorded $9.4 million, $8.1 million, and $15.9 million, respectively, related to restructuring actions which resulted from the elimination or relocation of various positions as part of restructuring plans approved by management. These actions are generally intended to streamline and focus our efforts and more properly align our cost structure with our projected revenue streams.
During 2011 management also completed the consolidation of our Colorado facilities and began the transition of certain engineering and product management and related support functions in our Andover, Massachusetts facility to other locations in order to gain efficiencies. Restructuring charges relating to these actions primarily included costs for idle facilities and, to a lesser extent, severance and relocation costs for impacted individuals.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Overview
We are a global leader in standards-based unified communications (“UC”) solutions and a leading provider of telepresence, video, voice and infrastructure solutions based on open standards. With Polycom ® RealPresence ® video and voice solutions, from infrastructure to endpoints, people all over the world can collaborate face-to-face without being in the same physical location. Individuals and teams can connect, solve, decide, and create through a high-definition visual experience from their desktops, meeting rooms, classrooms, mobile devices, web browsers, and specialized solutions such as video carts for bedside conferences in hospitals between patients and remote physicians. 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.
While we expect to adjust spending as necessary in light of global economic risks, we expect these strategic imperatives to drive our key initiatives and spending in 2012.
In May 2012, we entered into an agreement with a third party, pursuant to which we will divest our enterprise wireless voice solutions (“EWS”) business. The decision to divest EWS reflects our focus on initiatives that we expect to extend our leadership in our core unified communications business. The products and services that comprise our core unified communications business have historically experienced stronger sales growth and higher gross margins than our enterprise wireless voice solutions products and services. Our EWS product portfolio, which has been part of the UC personal product category, includes Wi-Fi and DECT handsets, related infrastructure and accessories, and generated revenues of approximately $94 million in calendar year 2011. We are working to close this transaction during the second half of 2012. As a result, we have reported the results of operations and financial position of EWS as discontinued operations within the condensed consolidated statements of operations and balance sheets for all periods presented. See Note 3 of Notes to Condensed Consolidated Financial Statements for further discussion of our discontinued operations. The discussion of our results of operations is based upon the results from our continuing operations unless otherwise indicated.
Revenues for the three and six months ended June 30, 2012 were $358.5 million and $704.2 million, respectively, an increase of 5% and 7%, respectively, compared to the same periods in 2011. For the three and six month periods ended June 30, 2012, our product revenues decreased by 4% and 3%, respectively, while our service revenues increased 48% and 54%, respectively, as compared to the same periods in 2011. On a year-to-date basis, the decrease in product revenues was primarily a result of lower sales of our UC group systems products, and to a lesser extent lower revenues from our UC platform products, which was partially offset by increased sales of our UC personal devices. The increase in services revenue was driven primarily by increased managed service revenues as a result of our acquisition of the Hewlett-Packard visual collaboration (“HPVC”) business in the third quarter of 2011.
From a segment perspective, our Americas, EMEA and APAC segment revenues, accounted for 50%, 22% and 28%, respectively, of our revenues in the three months ended June 30, 2012. Our Americas and APAC segment revenues increased by 3% and 16%, respectively, while our EMEA segment revenues decreased by 2%, for the three months ended June 30, 2012 as compared to the same period in 2011. The decline in EMEA revenue was driven by a difficult macro environment that resulted in lower than anticipated revenues. Our Americas, EMEA and APAC segment revenues, which accounted for 49%, 25% and 26%, respectively, of our revenues for the six months ended June 30, 2012, increased by 3%, 8%, and 11%, respectively, as compared to the same period in 2011. On a year-over-year basis, total product revenues declined during both the three and six months ended June 30, 2012 in our Americas and EMEA segments, but increased in our APAC segment, while services revenues increased in all our segments. See Note 14 of Notes to Condensed Consolidated Financial Statements for further information on our segments, including a summary of segment revenues, segment contribution margin, 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 and six months ended June 30, 2012 and 2011.
For the first half of 2012, we have experienced slower revenue growth rates than we have in recent years. We believe the slower revenue growth was due to several factors, including a company and industry transition from point products to solution selling which resulted in some customers requiring additional time to consider a more UC-centric strategy versus point product or end point only deployments; lower productivity of our sales force, particularly in North America, where we have recently made a number of changes; lower revenues in our EMEA segment impacted by the recent economic conditions in Europe; and lower spending in other key geographies such as China, India, Australia and the United States.
Operating margins decreased by 9 percentage points and 8 percentage points in the three and six months ended June 30, 2012, respectively, as compared to the same periods in 2011. These decreases are primarily due to operating expenses increasing by 19% and 18% year-over-year in the three and six months ended June 30, 2012, respectively, while revenues increased 5% and 7%, respectively. The increases in operating expenses were primarily due to increased restructuring costs, including the consolidation of certain facilities, increased amortization of purchased intangibles from companies acquired in 2011, and increased headcount-related costs including stock-based compensation costs. Operating expenses increased as a percentage of revenues to 59% and 57% in the three and six months ended June 30, 2012, respectively, from 52% in the corresponding periods in 2011. The increases in operating expenses as a percentage of revenues were primarily related to increases in restructuring costs and increases in sales and marketing expenses. These increases were in continuing support of our key strategic initiatives and in anticipation of higher revenue growth. Gross margins in both the three and six month ended June 30, 2012 were 2 percentage points lower, which also contributed to the lower operating margins. Gross margins were lower primarily due to the lower service gross margins associated with the managed services business we acquired from HP in 2011 and lower overall revenue levels.
During the six months ended June 30, 2012, we generated approximately $73.4 million in cash flow from combined continuing and discontinued operating activities, which after the impact of investing and financing activities described in further detail under “Liquidity and Capital Resources,” resulted in a $19.4 million net increase in our total cash and cash equivalents.
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 $0.8 million and $0.5 million for the three months ended June 30, 2012 and 2011, and $1.8 million and $1.1 million for the six months ended June 30, 2012 and 2011, 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.
Overall, product gross margins decreased by 2 percentage points in the three months and six months ended June 30, 2012, respectively, as compared to the same periods in 2011, due to lower than expected product sales volumes and increases in stock-based compensation expenses, freight costs, amortization of purchased intangibles and royalties. These increases were partially offset by lower warranty expense recorded in the three and six months ended 2012, respectively, as compared to the same periods in 2011. From a segment perspective, product gross margins in the three and six months ended June 30, 2012 decreased in our APAC segment and increased in our Americas and EMEA segments as compared to the same periods in 2011.
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 of $1.7 million and $1.0 million for the three months ended June 30, 2012 and 2011, respectively, and of $3.0 million and $1.5 million for the six months ended June 30, 2012 and 2011, respectively.
Overall, service gross margins decreased by 4 percentage points in the three months ended June 30, 2012, as compared to the corresponding period in the prior year. The decrease was primarily due to the lower margin managed services business we acquired as part of the HPVC acquisition in 2011. Direct spending costs increased primarily as a result of increased headcount-related costs, including stock-based compensation costs, as well as IT and facilities allocations as a result of a 27% increase in services organization headcount from June 30, 2011 to June 30, 2012. These increases were primarily due to the HPVC acquisition. Service gross margins decreased slightly in the six months ended June 30, 2012, as compared to the same period in 2011 as costs in the delivery of service were slightly higher than the associated increase in service revenues. Service gross margins were down for the three and six month periods ended June 30, 2012, respectively, in the EMEA and APAC segments, but were up in the Americas segment as compared to the same periods in the prior year.
We expect gross margins to decrease slightly 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 revenue 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; the potential of 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; warranty and recall costs and the timing of sales. In addition, we may experience higher prices on commodity components that are included in our products. In order to control expenses in any given quarter, we have taken actions to reduce costs such as imposing travel restrictions, postponing salary increases, requesting employees to use paid time off or implementing other cost control measures. Such actions may not be able to be implemented in a timely manner or may not be successful in completely offsetting the impact of lower-than-anticipated revenues.
Acquisition-related Costs
We expense all acquisition and other transaction related costs as incurred. These costs generally include outside services for legal and accounting fees and other integration services. We have spent and will continue to spend significant resources identifying and acquiring businesses. In addition, we have incurred costs related to planning and executing the divestiture of our enterprise wireless solutions business that was announced in May 2012.
During the three and six months ended June 30, 2012, we recorded $3.5 million and $5.5 million of acquisition-related expenses, as compared to $2.0 million and $4.3 million of acquisition-related costs, respectively, for the same periods in the prior year. These increased costs were primarily due to legal and administrative expenses incurred in planning and executing the divestiture of our enterprise wireless solutions business.
Interest and Other Income (Expense), Net
Interest and other income (expense), net, consists primarily of interest earned on our cash, cash equivalents and investments less bank charges resulting from the use of our bank accounts, gains and losses on investments, non-income related taxes and fees, and foreign exchange related gains and losses. Interest and other income (expense), net was a net expense of $1.0 million and $0.7 million during the three months ended June 30, 2012 and 2011, respectively. The increase in net expense of $0.3 million for the three months ended June 30, 2012 as compared to the corresponding period in 2011 was primarily due to an increase in foreign exchange losses.
Interest and other income (expense), net was a net expense of $2.8 million and $2.0 million during the six months ended June 30, 2012 and 2011, respectively. The increase in net expense of $0.8 million was primarily due to an increase in foreign exchange losses, partially offset by a decrease in losses on the impairment of investments and non-income related taxes and fees.
Interest and other income (expense), net, will fluctuate due to changes in interest rates and returns on our cash and investments, any future impairment of investments, foreign currency rate fluctuations on un-hedged exposures, fluctuations in costs associated with our hedging program and timing of non-income related taxes and license fees. The cash balance could also decrease depending upon the amount of cash used in any future acquisitions, our stock repurchase activity and other factors, which would also impact our interest income.
CONF CALL
Eric Brown - COO and CFO
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 - President and CEO
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 - COO and CFO
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 - President and CEO
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.
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