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POLYCOM INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge)
YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS IN CONJUNCTION WITH OUR
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES. EXCEPT FOR
HISTORICAL INFORMATION, THE FOLLOWING DISCUSSION CONTAINS FORWARD LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934. WHEN USED IN THIS REPORT,
THE WORDS "MAY," "BELIEVE," "COULD," "ANTICIPATE," "WOULD," "MIGHT," "PLAN,"
"EXPECT," "WILL," "INTEND," "POTENTIAL," "OBJECTIVE," "STRATEGY," "GOAL,"
"SHOULD," "VISION," "DESIGNED,"AND SIMILAR EXPRESSIONS OR THE NEGATIVE OF THESE
TERMS ARE INTENDED TO IDENTIFY FORWARD LOOKING STATEMENTS. THESE FORWARD LOOKING
STATEMENTS, INCLUDING, AMONG OTHER THINGS, STATEMENTS REGARDING OUR ANTICIPATED
PRODUCTS, CUSTOMER AND GEOGRAPHIC REVENUE LEVELS AND MIX, GROSS MARGINS,
OPERATING COSTS AND EXPENSES AND OUR CHANNEL INVENTORY LEVELS, INVOLVE RISKS AND
UNCERTAINTIES. OUR ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THOSE PROJECTED
IN THE FORWARD LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE FUTURE RESULTS TO
DIFFER MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD LOOKING STATEMENTS
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK FACTORS" IN THIS
DOCUMENT, AS WELL AS OTHER INFORMATION FOUND IN THE DOCUMENTS WE FILE FROM TIME
TO TIME WITH THE SECURITIES AND EXCHANGE COMMISSION, INCLUDING THE ANNUAL REPORT
ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2011.
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.
We believe important drivers for the adoption of Polycom UC solutions include:
• growth of video as a preferred method of communication everywhere,
including major growth markets such as Brazil, Russia, India, and China,
• increasing presence of video on the desktop,
• growth of video-capable mobile devices (including tablets and smartphones),
• expansion of social business tools with integrated web-based video collaboration,
• adoption of UC by small and medium businesses and governments globally,
• growth of the number of teleworkers globally,
• emergence of Bring Your Own Device (BYOD) programs in businesses of all
sizes,
• demand of UC solutions for business-to-business communications and the
move of consumer applications into the business space, and
• continued commitment by organizations and individuals to reduce their carbon footprint and expenses by choosing remote connectivity over travel.
We have developed a 2012 strategic plan that is designed to capture the emerging
network effect of UC adoption by enterprise, public sector, service providers,
SMBs, mobile and remote employees, and social business users. We believe we are
uniquely positioned as the UC ecosystem partner of choice through our strategic
partnerships, support of open standards, innovative technology and
customer-centric go-to-market capabilities. Central to our 2012 strategic plan
are five strategic imperatives:
• Cloud-Based UC Solutions;
• Mobile UC Solutions;
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• Focused Ecosystem Partnerships;
• Polycom®RealPresence® Platform (an expansion of our former UC Intelligent
Core Platform); and
• Growth Markets.
We expect these strategic imperatives to drive our key initiatives and spending
in 2012.
Revenues for the three months ended March 31, 2012 were $367.5 million, an
increase of $23.3 million, or 7%, over the same period of 2011. On a
year-over-year basis, our product revenues decreased 3% while our service
revenues increased 53%. The decrease in product revenues was primarily a result
of lower sales of our UC group systems, which was partially offset by increased
sales of our UC personal devices. Revenues from our UC platform (formerly
referred to as network infrastructure) products were essentially flat
year-over-year. 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, the Americas, EMEA and APAC segment revenues,
accounted for 49%, 27% and 24%, respectively, of our revenues in the first
quarter of 2012, and increased by 2%, 17% and 7% respectively, as compared to
the first quarter of 2011, primarily as a result of increased service revenues
in all our segments. Total product revenues declined year-over-year in the
Americas and APAC segments, but grew in the EMEA segment. See Note 13 of Notes
to Condensed Consolidated Financial Statements for further information on our
segments, including a summary of our 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 months ended March 31, 2012 and 2011.
While we generally experience slower revenue growth in the first quarter, in the
first quarter of 2012, we also experienced a slower revenue growth rate than
planned and our lowest year-over-year revenue growth rate since the fourth
quarter of 2009. We believe the slower revenue growth we experienced 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; and lower government
spending in key geographies such as China, India, Australia and the United
States.
Operating margins decreased by 6 percentage points in the three months ended
March 31, 2012 as compared to the comparable period in 2011, primarily due to
operating expenses increasing in absolute dollars by 15% year-over-year, while
revenues increased only 7%. Operating expenses increased as a percentage of
revenue to 54% in 2012 from 49% in 2011. The increases in operating expenses
included increases in sales and marketing expense, research and development
expense and, to a lesser extent, general and administrative expense, in
continuing support of our key strategic initiatives and in anticipation of
higher revenue growth.
During the three months ended March 31, 2012, we generated approximately $32.0
million in cash flow from operating activities which, after the impact of
investing and financing activities described in further detail under "Liquidity
and Capital Resources," resulted in a $14.8 million net increase in our total
cash and cash equivalents.
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Results of Operations for the Three Months Ended March 31, 2012 and 2011
The following table sets forth, as a percentage of revenues, condensed
consolidated statements of operations data for the periods indicated.
Three Months Ended
March 31, March 31,
2012 2011
Revenues:
Product revenues 76 % 83 %
Service revenues 24 % 17 %
Total revenues 100 % 100 %
Cost of revenues:
Cost of product revenues as a % of product revenues 41 % 39 %
Cost of service revenues as a % of service revenues 41 % 45 %
Total cost of revenues 41 % 40 %
Gross profit 59 % 60 %
Operating expenses:
Sales and marketing 31 % 29 %
Research and development 14 % 13 %
General and administrative 6 % 5 %
Amortization of purchased intangibles 1 % 0 %
Restructuring costs 1 % 1 %
Acquisition related costs 1 % 1 %
Total operating expenses 54 % 49 %
Operating income 5 % 11 %
Interest and other income (expense), net 0 % 1 %
Income before provision for income taxes 5 % 10 %
Provision for income taxes 1 % 0 %
Net income 4 % 10 %
Revenues
We manage our business primarily on a geographic basis, organized into three
geographic segments. Our net revenues, which include product and service
revenues, for each segment are summarized in the following table:
Three Months Ended
March 31, March 31,
$ in thousands 2012 2011 Increase
Americas $ 179,294 $ 175,751 2 %
% of revenues 49 % 51 %
EMEA $ 100,467 $ 86,077 17 %
% of revenues 27 % 25 %
APAC $ 87,707 $ 82,337 7 %
% of revenues 24 % 24 %
Total revenues $ 367,468 $ 344,165 7 %
Total revenues for the three months ended March 31, 2012 were $367.5 million, an
increase of $23.3 million, or 7%, over the same period of 2011. The increase in
revenue was due to a $31.2 million, or 53% increase in service revenues,
partially offset by a decrease in product revenues of $7.9 million, or 3%, when
comparing the three months ended March 31, 2012 to the comparable period in
2011. The increase in service revenue was primarily due to increased managed
service revenues as a result of the HPVC business acquisition that we completed
in the third quarter of 2011, and to a lesser extent increased maintenance
revenue on a larger installed base. The decrease in product revenues was
primarily a result of lower sales of our UC group systems, which was partially
offset by increased sales of our UC personal devices. Revenues from our UC
platform products were essentially flat year-over-year.
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All segments reflected increases in revenues in the three months ended March 31,
2012 when compared with the same period in 2011. Our Americas, EMEA and APAC
segment revenues increased by $3.5 million, or 2%, $14.4 million, or 17%, and
$5.4 million, or 7%, respectively, during the three months ended March 31, 2012
as compared to the same period in 2011. These increases were driven by increased
revenues across many of our key geographic markets, including Russia, Germany,
France, Turkey, Korea, Canada and China, partially offset by decreases in
Brazil, Spain, and Australia. Service revenues increased year-over-year in all
our segments, while product revenues grew year-over-year in the EMEA segment,
but declined in the Americas and APAC segments.
In the three months ended March 31, 2012 and 2011, one channel partner in our
Americas segment accounted for more than 10% of our total net revenues. We
believe it is unlikely that the loss of any of our channel partners would have a
long term material adverse effect on our consolidated net revenues or segment
net revenues as we believe end-users would likely purchase our products from a
different channel partner. However, a loss of any one of these channel partners
could have a material adverse impact during the transition period.
In addition to the primary view on a geographic basis, we also track revenues by
groups of similar products and services for various purposes. The following
table presents revenues for groups of similar products and services:
Three Months Ended
March 31, March 31,
$ in thousands 2012 2011 Increase
UC group systems $ 240,489 $ 228,944 5 %
UC personal devices 67,210 62,067 8 %
UC platform (formerly referred to as "network
infrastructure") 59,769 53,154 12 %
Total revenues $ 367,468 $ 344,165 7 %
UC group systems include all immersive telepresence, group video and group voice
systems products and the related service elements. The increase in UC group
systems of $11.5 million, or 5%, in 2012 over 2011 was primarily driven by
increases in sales of our immersive telepresence services in all our geographic
segments as a result of the HPVC acquisition. UC group systems revenues also
grew year-over-year primarily due to increases in sales of our group video
products and related services in the EMEA segment and, to a lesser extent
increases in sales of our group voice products and related services in both the
EMEA and APAC segments. These increases were partially offset by a decrease in
sales of our group video products and related services in our Americas and APAC
segments. UC group systems product revenues decreased 7% year-over-year,
primarily as a result of decreased sales of our group video products in our
Americas and APAC segments.
UC personal devices include desktop video devices, desktop voice and wireless
LAN products and the related service elements. The increase in UC personal
devices of $5.1 million, or 8%, in 2012 over 2011 was primarily due to increased
sales of our desktop voice products in all our geographic segments, driven by
the continued adoption of VoIP technologies. The increase was partially offset
by decreased desktop video revenues in all geographic segments, and decreased
revenues from wireless products and related services in the Americas and EMEA
segments.
UC platform, which we previously referred to as "network infrastructure",
includes our RealPresence® Platform hardware and software products and the
related service elements. The increase in UC platform of $6.6 million, or 12%,
in 2012 over 2011 was driven by increased revenues from our UC platform related
service elements in all our segments. UC platform product revenues were
essentially flat in the first three months of 2012 as compared to the first
three months of 2011.
Cost of Revenues and Gross Margins
Three Months Ended
March 31, March 31, Increase/
$ in thousands 2012 2011 (Decrease) Product Cost of Revenues $ 114,526 $ 111,987 2 %
% of Product Revenues 41 % 39 % 2 pts
Product Gross Margins 59 % 61 % (2 ) pts
Service Cost of Revenues $ 37,293 $ 26,424 41 %
% of Service Revenues 41 % 45 % (4 ) pts
Service Gross Margins 59 % 55 % 4 pts
Total Cost of Revenues $ 151,819 $ 138,411 10 %
% of Total Revenues 41 % 40 % 1 pts
Total Gross Margins 59 % 60 % (1 )pts
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
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margins included charges for stock-based compensation of $1.0 million and $0.6
million for the three months ended March 31, 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 ended March 31, 2012 as compared to the same period in 2011, due to lower
than expected product sales volumes, increased discounting and decreased use of
ocean freight which increased the cost of product revenues. These decreases were
partially offset by lower warranty expense recorded in the three months ended
March 31, 2012. Overhead absorption costs and other cost of sales such as
freight, warranty and royalties are not allocated to our segments. While product
gross margins increased slightly in our Americas and EMEA segments, product
gross margins decreased significantly in our APAC segment in the three months
ended March 31, 2012, as compared to the same period in the prior year. The
year-over-year decrease in the product gross margins of our APAC segment was
primarily driven by the mix shift toward lower margin products in UC group
systems, as well as an increase in discounting.
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 $1.4
million and $0.6 million for the three months ended March 31, 2012 and 2011,
respectively.
Overall, service gross margins increased by 4 percentage points in the three
months ended March 31, 2012 as compared to the same period in 2011, due to
increased revenues from our maintenance services and decreased costs as a
percentage of revenues associated with the delivery of services due to higher
productivity of services employees. Services gross margins increased in our
Americas segment, remained relatively flat in our EMEA segment and decreased in
our APAC segment primarily due to the higher productivity of services employees,
partially offset by the higher network circuit costs for providing managed
services in APAC.
We expect gross margins to remain relatively flat in the near term. Forecasting
future gross margin percentages is difficult, and there are a number of risks
related to our ability to maintain or improve our current gross margin levels.
Our cost of revenues as a percentage of 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.
Sales and Marketing Expenses
Three Months Ended
March 31, March 31,
$ in thousands 2012 2011 Increase
Expenses $ 113,679 $ 100,621 13 %
% of Revenues 31 % 29 % 2 pts
Sales and marketing expenses consist primarily of salaries and commissions for
our sales force, including stock-based compensation costs, advertising and
promotional expenses, product marketing expenses, and an allocation of overhead
expenses, including facilities and IT costs. Sales and marketing expenses,
except for direct sales and marketing expenses, are not allocated to our
segments. Sales and marketing expenses included charges for stock-based
compensation of $7.7 million and $4.8 million for the three month periods ended
March 31, 2012 and 2011, respectively.
Sales and marketing expenses increased by $13.1 million, or 13%, and increased
by 2 percentage points as a percentage of revenues in 2012 as compared to 2011.
The increase in sales and marketing expenses was due primarily to increased
headcount and compensation-related costs, including commissions and stock-based
compensation charges. Sales and marketing headcount increased by 9% in the first
quarter of 2012 as compared to the same period in 2011. Depreciation and
facilities allocations also increased as a result of headcount increases. Other
factors contributing to the increase in sales and marketing expenses included
increases in outside services, travel and entertainment expenses, recruitment
and spending on marketing programs.
We expect our sales and marketing expenses to continue to increase modestly in
absolute dollars in the near term as a result of incurring costs to recruit and
hire new sales and marketing personnel, and expenses will also likely increase
in the future as revenues increase. We will also make targeted investments in
sales and marketing in order to extend our market reach and grow our business in
support of our key strategic initiatives surrounding increasing our strategic
partnerships as part of our UC ecosystem and developing and marketing
cloud-based and mobile UC solutions, our RealPresence Platform and other
innovations that are expected throughout 2012.
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Forecasting sales and marketing expenses as a percentage of revenue is highly
dependent on expected revenue levels and could vary significantly depending on
actual revenues achieved in any given quarter. Marketing expenses will also
fluctuate depending upon the timing and extent of marketing programs as we
market new products and also depending upon the timing of trade shows. Sales and
marketing expenses may also fluctuate due to increased international expenses
and the impact of changes in foreign currency exchange rates.
Research and Development Expenses
Three Months Ended
March 31, March 31,
$ in thousands 2012 2011 Increase
Expenses $ 52,097 $ 44,231 18 %
% of Revenues 14 % 13 % 1 pt
Research and development costs are expensed as incurred and consist primarily of
compensation costs, including stock-based compensation costs, outside services,
expensed materials, depreciation and an allocation of overhead expenses,
including facilities and IT costs. Research and development costs are not
allocated to our segments. Research and development expenses included charges
for stock-based compensation of $4.8 million and $2.4 million for the three
months ended March 31, 2012 and 2011, respectively.
Research and development expenses increased by $7.9 million, or 18%, and
increased by 1 percentage point as a percentage of revenue during the three
months ended March 31, 2012, as compared to the same period in 2011. The
increase is primarily due to increased headcount and compensation-related costs,
including stock-based compensation. Facilities allocations and depreciation also
increased as a result of the increase in headcount. Research and development
headcount increased by 20% at March 31, 2012, as compared to March 31, 2011.
We believe that innovation and technological leadership is critical to our
future success, and we are committed to continuing a significant level of
research and development to develop new technologies and products. We are also
investing more heavily in research and development as a result of increased
business opportunities with strategic partners, mobile and service provider
customers as a result of our key strategic initiatives in these areas. We expect
that research and development expenses in absolute dollars will remain
relatively flat in the near term but will fluctuate depending on the timing and
number of development activities in any given quarter. Research and development
expenses as a percentage of revenue is highly dependent on expected revenue
levels and could vary significantly depending on actual revenues achieved in any
given quarter.
General and Administrative Expenses
Three Months Ended
March 31, March 31,
$ in thousands 2012 2011 Increase
Expenses $ 21,638 $ 18,429 17 %
% of Revenues 6 % 5 % 1 pt
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, litigation costs and
bad debt expense. General and administrative expenses are not allocated to our
segments. General and administrative expenses included charges for stock-based
compensation of $3.3 million and $1.8 million for the three months ended
March 31, 2012 and 2011, respectively.
General and administrative expenses increased by $3.2 million or 17% and
increased by 1 percentage point as a percentage of revenues during the three
months ended March 31, 2012, as compared to the same period in 2011. The
increase is primarily due to increased headcount of 12% as of March 31, 2012 as
compared to March 31, 2011, and compensation-related costs, including
stock-based compensation. The remaining increase in general and administrative
expenses was due to an increase in legal and other administrative expenses, and
to a lesser extent, increases in bad debt expense and in travel and training
costs.
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.
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 remain relatively
flat 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.
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Amortization of Purchased Intangibles
In the three months ended March 31, 2012 and 2011, we recorded $3.4 million and
$1.4 million of amortization of purchased intangibles, respectively. The
increase 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.
Restructuring
During the three months ended March 31, 2012, we recorded $2.9 million in
restructuring charges related to a restructuring plan approved in the fourth
quarter of 2011 which is designed to better align and allocate resources to more
strategic growth areas of the business. The actions taken during the quarter
ended March 31, 2012 were primarily related to the reorganization of our global
go-to-market and other organizations. We currently expect to record additional
restructuring charges of approximately $1.3 million in the second quarter of
2012 related to this action.
In addition, we have plans to consolidate and eliminate certain facilities in
order to gain efficiencies, including the combination of our headquarters and
San Jose and Santa Clara, California operations into one new location in San
Jose, California. The restructuring plan that was committed to in 2011 was
expected to result in restructuring charges related to idle facilities of
approximately $12.0 million upon vacating of the facilities in the second
quarter of 2012. During the three months ended March 31, 2012, we revised our
estimate of restructuring charges related to idle facilities, and as a result,
we expect to record approximately $8.7 million in additional restructuring
charges related to idle facilities upon vacating these facilities in the second
quarter of 2012.
During the three months ended March 31, 2011, we recorded $2.6 million in
restructuring charges related to ongoing reorganizations under the then new
leadership team, which resulted in the elimination of 51 positions worldwide and
enabled the hiring of additional positions to better align with the execution of
our strategic initiatives.
See Note 6 of Notes to Condensed Consolidated Financial Statements for further
information on restructuring costs.
In the future, we may take additional restructuring actions to gain operating
efficiencies or reduce our operating expenses, while simultaneously implementing
additional cost containment measures and expense control programs. Such
restructuring actions are subject to significant risks, including delays in
implementing expense control programs or workforce reductions and the failure to
meet operational targets due to the loss of employees or a decrease in employee
morale, all of which would impair our ability to achieve anticipated cost
reductions. If we do not achieve the anticipated cost reductions, our financial
results could be negatively impacted.
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 and
pursuing other strategic business opportunities. During the three months ended
March 31, 2012 and 2011, we recorded $1.9 million and $2.3 million of
acquisition-related costs, respectively, related to these activities.
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) was a net expense of $1.8 million and $1.3 million
during the three months ended March 31, 2012 and 2011, respectively.
The net expense increased in the three months ended March 31, 2012 compared to
the same period in the prior year primarily due to a foreign exchange loss of
$1.1 million recorded during the three months ended March 31, 2012 as compared
to a foreign exchange gain of $0.2 million during the same period in 2011. This
increase is partially offset by the $0.5 million recognized in the first quarter
of 2011 related to investments that we considered to be other than temporarily
impaired when no such impairment was recorded in the same period in 2012. The
increase is also partially offset by a decrease of $0.4 million in 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.
Provision for Income Taxes
Our overall effective tax rate for the three months ended March 31, 2012 and
2011 was 17.1% and 2.6%, respectively, which resulted in a provision for income
taxes of $3.1 million and $0.9 million, respectively. The increase in the
effective tax rate for the three months ended March 31, 2012 as compared to the
same period in 2011 was primarily related to a discrete benefit recorded in the
first quarter of 2011 for the release of $7.5 million in tax reserves inclusive
of interest associated with the resolution of a multi-year income tax audit.
Partially offsetting
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the effect of the benefit from the reserve releases was a relative increase in
foreign earnings subject to lower tax rates in the quarter ending March 31, 2012
as compared to the same period in the prior year. In addition, for the three
months ended March 31, 2011, the effective tax rate reflects the benefit of the
federal research and development tax credit which was not reflected in the tax
rate in the first quarter of 2012, due to the expiration of the federal research
tax credit for amounts paid or incurred after December 31, 2011.
During the three months ended March 31, 2011, we released $6.8 million in tax
reserves exclusive of interest and penalties. The reserve release was associated
with the resolution of a multi-year tax audit. As of March 31, 2012, we have
$32.4 million of unrecognized tax benefits. We anticipate that except for $3.6
million in uncertain tax positions that may be reduced related to the lapse of
various statutes of limitation, there will be no material changes in uncertain
tax positions in the next 12 months.
We recognize interest and/or penalties related to income tax matters in income
tax expense. As of March 31, 2012 and 2011, we had approximately $2.2 million
and $2.0 million, respectively, of accrued interest and penalties related to
certain tax positions.
We are also subject to the periodic examination of our income tax returns by the
Internal Revenue Service ("IRS") and other tax authorities, and in some cases we
have received additional tax assessments. The timing of the resolution of income
tax examinations is highly uncertain and the amounts ultimately paid, if any,
upon resolution of the issues raised by the taxing authorities may differ
materially from the amounts accrued for each year. While it is reasonably
possible that some issues in current on-going tax examinations could be resolved
within the next 12 months, based on the current facts and circumstances, we
cannot estimate the timing of such resolution or the range of potential changes
as it relates to the unrecognized tax benefits that are recorded as part of our
financial statements. We do not expect any material settlements in the next 12
months, but the outcome of the examinations is inherently uncertain.
Segment Information
A description of our products and services, as well as selected financial data,
for each segment can be found in Note 13 to Condensed Consolidated Financial
Statements. Future changes to our organizational structure or business may
result in changes to the reportable segments disclosed. The discussions below
include the results of each of our segments for the three months ended March 31,
2012 and 2011.
Segment contribution margin includes all segment revenues less the related cost
of sales and direct marketing and sales expenses. Management allocates some
infrastructure costs such as facilities and IT costs in determining segment
contribution margin. Contribution margin is used, in part, to evaluate the
performance of, and to allocate resources to, each of the segments. Certain
operating expenses are not allocated to segments because they are separately
managed at the corporate level. These unallocated costs include corporate
manufacturing costs, sales and marketing costs other than direct sales and
marketing, stock-based compensation costs, research and development costs,
general and administrative costs, such as legal and accounting costs,
acquisition-related costs, amortization of purchased intangible assets,
restructuring costs and interest and other income (expense), net.
Three Months Ended
March 31, March 31,
$ in thousands 2012 2011 Increase
Americas $ 179,294 $ 175,751 2 %
% of revenues 49 % 51 %
EMEA $ 100,467 $ 86,077 17 %
% of revenues 27 % 25 %
APAC $ 87,707 $ 82,337 7 %
% of revenues 24 % 24 %
Total revenues $ 367,468 $ 344,165 7 %
The following is a summary of the financial information for each of our segments
for the three month periods ended March 31, 2012 and 2011 (in thousands):
Americas EMEA APAC Total
2012:
Revenue $ 179,294 $ 100,467 $ 87,707 $ 367,468
% of total revenue 49 % 27 % 24 % 100 %
Contribution margin 75,624 42,961 36,182 154,767
% of segment revenue 42 % 43 % 41 %
42 %
2011:
Revenue $ 175,751 $ 86,077 $ 82,337 $ 344,165
% of total revenue 51 % 25 % 24 % 100 %
Contribution margin 72,234 33,064 40,598 145,896
% of segment revenue 41 % 38 % 49 % 42 %
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Americas
Three Months Ended
March 31, March 31,
$ in thousands 2012 2011 Increase
Revenue $ 179,294 $ 175,751 2 %
Contribution margin $ 75,624 $ 72,234 5 %
Contribution margin as % of Americas revenues 42 % 41 % 1 pt
Our Americas segment revenues increased by 2% in the three months ended
March 31, 2012 as compared with 2011, primarily due to increased revenues in
Canada, Argentina, Chile and Peru. The increases in these countries were
partially offset by decreases in Brazil and Mexico. Revenues in the United
States were essentially flat year-over-year. The increase in revenues was driven
by increases in our UC personal devices and UC platform revenues partially
offset by a decrease in UC group systems revenues. UC platform revenues growth
was as a result of increased sales of our RealPresence Platform services.
Increases in UC personal devices revenues in the Americas were primarily driven
by increased desktop voice revenues resulting from continued adoption of VoIP
technologies. Decreases in UC group systems revenues were primarily driven by
decreased group video revenues, partially offset by an increase in immersive
telepresence revenues as a result of increased managed services revenues due to
the HPVC acquisition in the third quarter of 2011. While service revenues grew
year-over-year in the Americas, product revenues declined by 7% year-over-year,
due to a decrease in UC group product sales, which was only partially offset by
increased sales of our UC personal products. Revenues from our UC platform
products were essentially flat year-over-year.
In both the three months ended March 31, 2012 and 2011, one channel partner in
our Americas segment accounted for 27% of our Americas net revenues. We believe
it is unlikely that the loss of any of our channel partners would have a long
term material adverse effect on our consolidated net revenues or segment net
revenues as we believe end-users would likely purchase our products from a
different channel partner. However, a loss of any one of these channel partners
could have a material adverse impact during the transition period.
Contribution margin as a percentage of the Americas segment revenues was 42% and
41% for the three months ended March 31, 2012 and 2011, respectively. The
contribution margin as a percentage of revenue increased due primarily to
increased gross margins. The increase in gross margins was driven primarily by
the increase in services gross margins in the Americas as a result of increased
revenues from our maintenance services and deceased costs as a percentage of
revenue. Direct sales and marketing expenses increased in absolute dollars but
remained relatively flat as a percentage of revenues. The increases in absolute
dollars were primarily due to increased headcount and headcount-related
expenses. Contribution margin as a percentage of revenue will fluctuate in 2012
as we continue to take actions to optimize our North American sales
organization.
EMEA
Three Months Ended
March 31, March 31,
$ in thousands 2012 2011 Increase
Revenue $ 100,467 $ 86,077 17 %
Contribution margin $ 42,961 $ 33,064 30 %
Contribution margin as % of EMEA revenues 43 % 38 % 5 pts
Our EMEA segment revenues increased by 17% in the three months ended March 31,
2012 as compared with the same period in 2011, due to broad-based growth
throughout most of EMEA, being led by growth in Russia, Turkey, Germany, France
and Benelux, partially offset by decreases in Spain and the Nordic countries.
The overall increase in revenues was driven by increases in our UC group systems
and UC personal devices revenues, and to a lesser extent UC platform revenues.
Increases in UC group systems revenues in EMEA were primarily driven by
increased group video revenues, increased immersive telepresence revenues and to
a lesser extent, increased group voice revenues. Increases in UC personal
devices revenues were primarily driven by increased desktop voice sales
resulting from continued adoption of VoIP technologies, partially offset by
decreases in wireless and desktop video revenues. UC platform revenues growth
was a result of increased services related to our RealPresence Platform, which
was partially offset by a year-over-year decrease in UC platform product
revenues.
In both the three months ended March 31, 2012 and 2011, one channel partner in
our EMEA segment accounted for 11% of our EMEA net revenues. We believe it is
unlikely that the loss of any of our channel partners would have a long term
material adverse effect on our consolidated net revenues or segment net revenues
as we believe end-users would likely purchase our products from a different
channel partner. However, a loss of any one of these channel partners could have
a material adverse impact during the transition period.
Contribution margin as a percentage of EMEA segment revenues was 43% in the
three months ended March 31, 2012 as compared to 38% in the three months ended
March 31, 2011. The contribution margin as a percentage of revenue increased
primarily due to higher gross margins and lower direct sales and marketing
expenses as a percentage of revenues. The increase in gross margins was driven
primarily by a mix shift toward revenues from higher margin products in UC group
systems and lower overhead product costs. Direct sales and marketing expenses
increased slightly in absolute dollars, but decreased as a percentage of
revenues. The decrease in direct sales and marketing expenses as a percentage of
revenue was due primarily to increased productivity of our sales force.
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APAC
Three Months Ended
March 31, March 31, Increase/
$ in thousands 2012 2011 (Decrease)
Revenue $ 87,707 $ 82,337 7 %
Contribution margin $ 36,182 $ 40,598 (11 %)
Contribution margin as % of APAC revenues 41 % 49 % (8 )pts
Our APAC segment revenues increased by 7% in the three months ended March 31,
2012 as compared with the corresponding period in 2011. Increased revenues from
Korea, China and India contributed to the growth in APAC. The overall increase
in revenues was driven by increases in our UC group systems, UC platform, and to
a lesser extent, UC personal devices revenues. Increases in UC group systems
revenues were primarily driven by increased immersive telepresence revenues
associated with our managed services acquired in the HPVC acquisition in the
third quarter of 2011, and increased group voice revenues, partially offset by
decreased group video revenues. UC platform revenues growth was a result of
increased sales of the products and services that comprise our RealPresence ®
Platform. Increases in UC personal devices revenues were primarily driven by
increased desktop voice sales resulting from continued adoption of VoIP
technologies, partially offset by a decrease in desktop video revenues. While
service revenues grew year-over-year, APAC product revenues declined by 3%
year-over-year, due to a decrease in UC group product sales, which was only
partially offset by increased sales of our UC personal and UC platform products.
In the three months ended March 31, 2012, two channel partners in our APAC
segment, in aggregate, accounted for 36% of our APAC net revenues. In the three
months ended March 31, 2011, two channel partner in our APAC segment accounted
for 33% of our APAC net revenues. We believe it is unlikely that the loss of any
of our channel partners would have a long term material adverse effect on our
consolidated net revenues or segment net revenues as we believe end-users would
likely purchase our products from a different channel partner. However, a loss
of any one of these channel partners could have a material adverse impact during
the transition period.
Contribution margin as a percentage of APAC segment revenues was 41% in the
three months ended March 31, 2012 as compared to 49% in the three months ended
March 31, 2011. The contribution margin as a percentage of revenue decreased
primarily due to lower gross margins and higher direct sales and marketing
expenses as a percentage of revenues. The decrease in gross margin was primarily
due to a mix shift toward lower margin products in UC group systems and the
increased cost in maintaining the network circuits for our managed services
offerings, as well as an increase in discounting. Direct sales and marketing
expenses increased in absolute dollars in 2012 as compared to 2011 due to the
continued investment in growing countries in APAC. Direct sales and marketing
expenses increased as a percentage of revenues as a result of the lower than
anticipated revenues.
Liquidity and Capital Resources
As of March 31, 2012, our principal sources of liquidity included cash and cash
equivalents of $390.3 million, short-term investments of $173.9 million and
long-term investments of $53.8 million. Substantially all of our short-term and
long-term investments are comprised of U.S. government and agency securities and
corporate debt securities. See Note 8 of Notes to our Condensed Consolidated
Financial Statements for further information on our short-term and long-term
investments. We also have outstanding letters of credit totaling approximately
$3.9 million, the majority of which are in place to satisfy certain of our
facility lease requirements.
Our total cash and cash equivalents and investments held in the United States
totaled $216.6 million as of March 31, 2012, and the remaining $401.4 million
was held by various foreign subsidiaries outside of the United States.
If we would need to access our cash and cash equivalents and investments held
outside of the United States in order to fund acquisitions, share repurchases or
our working capital needs, we may be subject to additional U.S. income taxes
(subject to an adjustment for foreign tax credits) and foreign withholding
taxes.
We generated cash from operating activities totaling $32.0 million in the three
months ended March 31, 2012, compared to $45.6 million in the comparable period
of 2011. The decrease in cash provided from operating activities for the three
months ended March 31, 2012 was due primarily to decreased net income after
adjustment of non-cash expenses, increased inventories and prepaid expenses and
other assets, and a decrease in other accrued liabilities. Partially offsetting
these negative effects were decreases in trade receivables, and deferred taxes,
and an increase in taxes payable.
The total net change in cash and cash equivalents for the three months ended
March 31, 2012 was an increase of $14.8 million. The primary sources of cash
were $32.0 million from operating activities, $14.6 million associated with the
exercise of stock options and purchases under the employee stock purchase plan
and $4.9 million in excess tax benefits from stock-based compensation. The
primary uses of cash during this period $15.8 million for purchases of property
and equipment, $11.3 million of purchases of investments, net of proceeds from
sales and maturities and $9.7 million for purchases of our common stock to
satisfy tax withholding obligations as a result of the vesting of performance
shares and restricted stock units. The positive cash from operating activities
was primarily the result of net income, adjusted for non-cash expenses and other
items (such as depreciation, amortization, inventory write-downs for excess and
obsolescence, provision for doubtful accounts, loss on disposal of property and
equipment and non-cash stock based compensation), decreases in trade
receivables, and deferred taxes and an increase in taxes payable. Partially
offsetting the positive effect of these items were increases in inventories,
prepaid expenses and other assets and a decrease in other accrued liabilities.
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Our days sales outstanding, or DSO, metric was 52 days at March 31, 2012
compared to 46 days at March 31, 2011. The increase in DSO is due in part to
increased mix of international receivables, which typically have longer payment
terms. We expect to continue to experience upward pressure on our DSO as a
result of the increase in international receivables. DSO could vary as a result
of a number of factors such as fluctuations in revenue linearity, a change in
the mix of international receivables, and increases in receivables from service
providers and government entities, which also have customarily longer payment
terms. DSO could also be negatively impacted if our partners experience
difficulty in financing purchases, which results in delays in payment to us.
Our March 31, 2012 inventory levels increased compared to the year ago period
and our inventory turns were 5.0 turns at March 31, 2012 as compared to 4.8
turns at March 31, 2011. Inventory turns in the future will 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 business.
We enter into foreign currency forward contracts, which typically mature in one
month, to hedge our exposure to foreign currency fluctuations of foreign
currency-denominated receivables, payables, and cash balances. We record on the
condensed consolidated balance sheet at each reporting period the fair value of
our foreign currency forward contracts and record any fair value adjustments in
results of operations. Gains and losses associated with currency rate changes on
contracts are recorded as interest and other income (expense), net, offsetting
transaction gains and losses on the related assets and liabilities.
Additionally, our hedging costs can vary depending upon the size of our hedge
program, whether we are purchasing or selling foreign currency relative to the
U.S. dollar and interest rates spreads between the U.S. and other foreign
markets.
Additionally, we also have a hedging program that uses foreign currency forward
contracts to hedge a portion of anticipated revenues and operating expenses
denominated in the Euro and British Pound as well as operating expenses
denominated in Israeli Shekels. Our foreign exchange risk management program
objective is to reduce volatility in our cash flows from unanticipated foreign
currency fluctuations. At each reporting period, we record the fair value of our
unrealized forward contracts on the condensed consolidated balance sheet with
related unrealized gains and losses as a component of accumulated other
comprehensive income, a separate element of stockholders' equity. Realized gains
and losses associated with the effective portion of the foreign currency forward
contracts are recorded within revenue or operating expense, depending upon the
underlying exposure being hedged. Any excluded and ineffective portions of a
hedging instrument would be recorded as interest and other income (expense),
net.
From time to time, the Board of Directors has approved plans to purchase shares
of our common stock in the open market. During the three months ended March 31,
2012 and 2011, we did not purchase any shares of our common stock in the open
market. As of March 31, 2012, the Company was authorized to purchase up to an
additional $78.0 million of shares in the open market under the current share
repurchase plan. See Note 10 of our Notes to Condensed Consolidated Financial
Statements for a discussion of the accounting for our common stock repurchases
and the related reduction to retained earnings included in stockholder's equity
in our condensed consolidated balance sheets.
At March 31, 2012, we had open purchase orders related to our contract
manufacturers and other contractual obligations of approximately $226.1 million
primarily related to inventory purchases. We also currently have commitments
that consist of obligations under our operating leases. In the event that we
decide to cease using a facility and seek to sublease such facility or terminate
a lease obligation through a lease buyout or other means, we may incur a
material cash outflow at the time of such transaction, which will negatively
impact our operating results and overall cash flows. In addition, if facilities
rental rates decrease or if it takes longer than expected to sublease these
facilities, we could incur a significant further charge to operations and our
operating and overall cash flows could be negatively impacted in the period that
these changes or events occur.
These purchase commitments and lease obligations are reflected in our Condensed
Consolidated Financial Statements once goods or services have been received or
at such time that we are obligated to make payments related to these goods,
services or leases. The table set forth below shows, as of March 31, 2012, the
future minimum lease payments due under our current lease obligations. There was
no sublease income netted in the amounts below. In addition to these minimum
lease payments, we are contractually obligated under the majority of our
operating leases to pay certain operating expenses during the term of the lease
such as maintenance, taxes and insurance. Our contractual obligations as of
March 31, 2012 are as follows (in thousands):
Other
Net Minimum Projected Annual Long-Term Purchase
Lease Payments Operating Costs Liabilities CommitmentsThree months ending March 31,
Remainder of 2012 $ 15,494 $ 2,629 $ - $ 222,928
2013 23,100 3,141 1,298 3,210
2014 25,885 2,304 1,532 -
2015 21,567 1,652 1,422 -
2016 19,087 1,350 2,403 -
Thereafter 70,012 2,083 7,637 -
Total payments $ 175,145 $ 13,159 $ 14,292 $ 226,138
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As discussed in Note 14 of our Notes to Condensed Consolidated Financial
Statements, at March 31, 2012, we have unrecognized tax benefits, including
related interest, totaling $34.6 million, $3.6 million of which may be released
in the next 12 months due to the lapse of certain statutes of limitation in the
applicable tax jurisdictions. In addition, payments we make for income taxes may
increase during 2012 as our available net operating losses and research and
development tax credits are depleted.
We believe that our available cash, cash equivalents and investments will be
sufficient to meet our operating expenses and capital requirements for the next
12 months based on our current business plans. However, we may require or desire
additional funds to support our operating expenses and capital requirements or
for other purposes, such as acquisitions, and may seek to raise such additional
funds through public or private equity financing, debt financing or from other
sources. We cannot assure you that additional financing will be available at all
or that, if available, such financing will be obtainable on terms favorable to
us and would not be dilutive. Our future liquidity and cash requirements will
depend on numerous factors, including the introduction of new products and
potential acquisitions of related businesses or technology.
Off-Balance Sheet Arrangements
As of March 31, 2012, we did not have any off-balance sheet arrangements, as
defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
Critical Accounting Policies and Estimates
Our Condensed Consolidated Financial Statements have been prepared in accordance
with accounting principles generally accepted in the United States of America.
We review the accounting policies used in reporting our financial results on a
regular basis. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses and related disclosure of contingent assets and
liabilities. On an ongoing basis, we evaluate our process used to develop
estimates, including those related to product returns, accounts receivable,
inventories, investments, intangible assets, income taxes, warranty obligations,
restructuring, contingencies and litigation. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
for making judgments about the carrying value of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates due to actual outcomes being different from those on which we based
our assumptions. These estimates and judgments are reviewed by management on an
ongoing basis and by the Audit Committee at the end of each quarter prior to the
public release of our financial results.
Our significant accounting policies were described in Note 1 to our audited
Consolidated Financial Statements and under "Critical Accounting Policies and
Estimates" in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included in our Annual Report on Form 10-K for the year
ended December 31, 2011. There have been no significant changes to these
policies or recent accounting pronouncements or changes in accounting
pronouncements that are of potential significance to us during the three months
ended March 31, 2012.
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