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Polycom Reports Significant Improvement in Operating Performance on Revenue of $336 Million in Third Quarter 2014

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Polycom, Inc. (Nasdaq: PLCM) today reported third quarter 2014 revenues of $336 million, non-GAAP net income of $31 million and non-GAAP earnings per diluted share of 22 cents. GAAP net income for the third quarter was $17 million, or 12 cents per diluted share. A reconciliation of GAAP to non-GAAP results is provided in the tables at the end of this press release.

“Our customers continue to adopt Polycom technology which enhances employee productivity, improves business agility and allows customers to contain costs,” stated Peter Leav, President and Chief Executive Officer. “We are committed to developing the best solutions in the marketplace, while driving continuous improvement in our financial model.”

“Operating margins grew significantly on both an absolute dollar and percentage basis versus the year ago period,” said Laura Durr, Chief Financial Officer and Executive Vice President. “Polycom also generated $34 million in operating cash flow and repurchased $25 million in common stock during the quarter.”

On a comparative basis, consolidated financial results were:

($ in millions, except per share data) Q3 2014 Q2 2014 Q3 2013

Year-Over-Year

Change

Revenues $ 335.7 $ 332.0 $ 336.5
Non-GAAP Net Income $ 30.7 $ 29.6 $ 19.3 59%
Non-GAAP EPS $ 0.22 $ 0.21 $ 0.11 100%
GAAP Net Income (Loss) $ 17.0 $ 8.6 $ (24.0 ) 171%
GAAP EPS $ 0.12 $ 0.06 $ (0.14 ) 186%

On a geographic basis, consolidated revenues were comprised of:

($ in millions) Q3 2014 Q2 2014 Q3 2013

Year-Over-Year

Change

Americas $ 166.4 $ 167.8 $ 177.3 (6)%
% of revenues 50 % 51 % 53 %
Europe, Middle East & Africa (EMEA) 84.0 83.1 $ 80.0 5%
% of revenues 25 % 25 % 24 %
Asia Pacific 85.3 81.1 $ 79.2 8%
% of revenues 25 % 24 % 23 %
Totals * $ 335.7 $ 332.0 $ 336.5

* may not foot due to rounding

By product category, inclusive of its service component, consolidated revenues were comprised of:

($ in millions) Q3 2014 Q2 2014 Q3 2013

Year-Over-Year

Change

UC Group Systems $ 217.3 $ 218.5 $ 221.4 (2)%
% of revenues 65 % 66 % 66 %
UC Personal Devices 60.1 53.6 56.9 6%
% of revenues 18 % 16 % 17 %
UC Platform 58.3 59.9 58.2
% of revenues 17 % 18 % 17 %
Totals * $ 335.7 $ 332.0 $ 336.5

* may not foot due to rounding

In Q3 2014, Polycom generated a total of $34 million in operating cash flow. Operating cash flow on a trailing 12 month basis was $164 million. Cash and investments at the end of Q3 2014 totaled $643 million, of which approximately $248 million is located onshore. Net of existing debt, cash and investments at the end of Q3 2014 totaled $399 million.

Earnings Call Details

Polycom will hold a conference call today, October 22, 2014, at 5:00 p.m. ET/2:00 p.m. PT to discuss these third quarter 2014 financial results and guidance for the fourth quarter 2014. You may participate by listening to the webcast at www.polycom.com/investors or, for callers in the U.S. and Canada, you may participate by calling 1.800.895.6437 and for callers outside of the U.S. and Canada, by calling 1.212.231.2931. The pass code for the call is “Polycom.” A replay of the call will also be available at www.polycom.com or, for callers in the U.S. and Canada, at 1.800.633.8284 and, for callers outside of the U.S. and Canada, at 1.402.977.9140. The access number for the replay is 21736661. A replay of the call will be available on www.polycom.com for at least three months.

Forward Looking Statements and Risk Factors

This release contains forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 regarding our future solutions and continuous improvement in our financial model. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially, including the impact of competition on our product sales and for our customers and partners and any resulting loss of business; the impact of increased competition due to consolidation in our industry or competition from companies that are larger or that have greater resources than we do; potential fluctuations in results and future growth rates; risks associated with global economic conditions and external market factors; the market acceptance of our products and changing market demands, including demands for differing technologies or product and services offerings; our ability to successfully implement process improvements and cost containment initiatives; changes to our strategic areas of focus; our ability to successfully integrate our acquisitions into our business; possible delays in the development, availability and shipment of new products due to engineering, manufacturing or other delays; increasing costs and the availability and differing uses of capital; changes in key personnel that may cause disruption to the business; the impact of restructuring actions; and the impact of global conflicts that may adversely impact our business. Many of these risks and uncertainties are discussed in the Company’s Quarterly Report on Form 10-Q for the period ended June 30, 2014, and in other reports filed by Polycom with the SEC. Polycom disclaims any intent or obligations to update these forward-looking statements.

Polycom reserves the right to modify future product plans at any time. Products and/or related specifications referenced in this press release are not guaranteed and will be delivered on a when and if available basis.

GAAP to non-GAAP Reconciliation

To supplement our consolidated financial statements presented on a GAAP basis, Polycom uses non-GAAP measures of operating results, net income and income per share, which are adjusted to exclude certain costs, expenses, gains and losses we believe appropriate to enhance an overall understanding of our past financial performance and also our prospects for the future. These adjustments to our current period GAAP results are made with the intent of providing both management and investors a more complete understanding of Polycom’s underlying operational results and trends and our marketplace performance. For example, the non-GAAP results are an indication of our baseline performance before gains, losses, or other charges that are considered by management to be outside of our core operating results. In addition, these adjusted non-GAAP results are among the primary indicators management uses as a basis for our planning and forecasting of future periods. The presentation of this additional information is not meant to be considered in isolation or as a substitute for net income or diluted net income per share prepared in accordance with generally accepted accounting principles in the United States.

About Polycom

Polycom helps organizations unleash the power of human collaboration. More than 400,000 companies and institutions worldwide defy distance with secure video, voice and content solutions from Polycom to increase productivity, speed time to market, provide better customer service, expand education and save lives. Polycom and its global partner ecosystem provide flexible collaboration solutions for any environment that deliver the best user experience, the broadest multi-vendor interoperability and unmatched investment protection. Visit http://www.polycom.com/or connect with us on Twitter, Facebook and LinkedIn to learn more.

(c) 2014 Polycom, Inc. All rights reserved. POLYCOM(R), the Polycom logo, and the names and marks associated with Polycom’s products are trademarks and/or service marks of Polycom, Inc. and are registered and/or common law marks in the United States and various other countries. All other trademarks are property of their respective owners.

POLYCOM, INC.

Condensed Consolidated Statements of Operations

(In thousands, except per share amounts)

(Unaudited)

Three Months Ended Nine Months Ended
September 30,

2014

September 30,

2013

September 30,

2014

September 30,

2013

Revenues:
Product revenues $ 240,059 $ 242,515 $ 708,133 $ 740,066
Service revenues 95,627 93,946 288,096 280,381
Total revenues 335,686 336,461 996,229 1,020,447
Cost of revenues:
Cost of product revenues 101,399 102,830 296,745 309,994
Cost of service revenues 37,617 38,587 115,607 114,714
Total cost of revenues 139,016 141,417 412,352 424,708
Gross profit 196,670 195,044 583,877 595,739
Operating expenses:
Sales and marketing 97,953 107,292 289,757 325,663
Research and development 51,024 54,220 148,202 164,782
General and administrative 25,746 28,468 74,175 76,461
Amortization of purchased intangibles 2,435 2,487 7,363 7,535
Restructuring costs (2,631 ) 24,887 36,887 34,639
Litigation reserves and payments 3,130 3,130
Transaction-related costs 39 156 3,411
Total operating expenses 177,657 217,393 559,670 612,491
Operating Income (loss) 19,013 (22,349 ) 24,207 (16,752 )
Interest and other income (expense), net
Interest expense (1,470 ) (850 ) (4,404 ) (1,736 )
Other income (expense) 1,285 (784 ) 1,828 (1,041 )
Interest and other income (expense), net (185 ) (1,634 ) (2,576 ) (2,777 )
Income (loss) from continuing operations before provision for (benefit from) income taxes 18,828 (23,983 ) 21,631 (19,529 )
Provision for (benefit from) income taxes 1,817 (5 ) 54 (2,963 )
Net income (loss) from continuing operations 17,011 (23,978 ) 21,577 (16,566 )
Gain from sale of discontinued operations, net of taxes 459
Net income (loss) $ 17,011 $ (23,978 ) $ 21,577 $ (16,107 )
Basic net income (loss) per share:
Net income (loss) per share from continuing operations $ 0.12 $ (0.14 ) $ 0.16 $ (0.10 )
Gain per share from sale of discontinued operations, net

of taxes

Basic net income (loss) per share $ 0.12 $ (0.14 ) $ 0.16 $ (0.09 )
Diluted net income (loss) per share:
Net income (loss) per share from continuing operations $ 0.12 $ (0.14 ) $ 0.15 $ (0.10 )

Gain per share from sale of discontinued operations, net of taxes

Diluted net income (loss) per share $ 0.12 $ (0.14 ) $ 0.15 $ (0.09 )
Number of shares used in computation of net income (loss) per share:
Basic 136,606 170,310 137,139 172,644
Diluted 142,176 170,310 142,406 172,644

Note: Earnings per share amounts for continuing operations, discontinued operations and net income, as presented above, are calculated individually and may not sum due to rounding differences.

As a result of the net loss from continuing operations in some of the periods presented, all potentially issuable common shares for those periods have been excluded from the diluted shares used in the computation of earnings per share as their effect is anti-dilutive.

POLYCOM, INC.

Reconciliation of GAAP to Non-GAAP Net Income (Loss)

(In thousands, except per share amounts)

(Unaudited)

Three Months Ended Nine Months Ended
September 30,

2014

September 30,

2013

September 30,

2014

September 30,

2013

GAAP net income (loss) $ 17,011 $ (23,978 ) $ 21,577 $ (16,107 )
Gain from sale of discontinued operations, net of taxes (459 )
Amortization of purchased intangibles 3,167 3,735 9,667 11,279
Restructuring costs (2,631 ) 24,887 36,887 34,639
Litigation reserves and payments 3,130 3,130
Transaction-related costs 39 156 3,411
Stock-based compensation expense 14,768 17,202 34,178 53,300
Effect of stock-based compensation on warranty rates 204 120 410 421

Costs associated with CEO separation and related SEC

investigation

960 2,107 1,951 2,107
Income tax effect of non-GAAP exclusions (5,865 ) (4,826 ) (21,545 ) (20,088 )
Non-GAAP net income $ 30,744 $ 19,286 $ 86,411 $ 68,503
GAAP net income (loss) per share
Basic $ 0.12 $ (0.14 ) $ 0.16 $ (0.09 )
Diluted $ 0.12 $ (0.14 ) $ 0.15 $ (0.09 )
Non-GAAP net income per share
Basic $ 0.22 $ 0.11 $ 0.63 $ 0.40
Diluted $ 0.22 $ 0.11 $ 0.61 $ 0.39
Number of shares used in computation of net

income (loss) per share:

Basic 136,606 170,310 137,139 172,644
Diluted 142,176 173,992 142,406 176,241

Note: As a result of the GAAP net loss from continuing operations in some of the periods presented, all potentially issuable common shares for those periods have been excluded from the diluted shares used in the computation of GAAP earnings per share as their effect is anti-dilutive.

POLYCOM, INC.

Condensed Consolidated Balance Sheets

(In thousands)

(Unaudited)

September 30,

2014

December 31,

2013

ASSETS
Current assets
Cash and cash equivalents $ 406,323 $ 392,629
Short-term investments 151,069 134,684
Trade receivables, net 181,447 183,369
Inventories 97,949 103,309
Deferred taxes 37,547 37,085
Prepaid expenses and other current assets 63,214 50,352
Total current assets 937,549 901,428
Property and equipment, net 106,081 115,157
Long-term investments 85,599 56,372
Goodwill and purchased intangibles, net 587,021 596,918
Deferred taxes 47,416 51,398
Other assets 28,062 27,757
Total assets $ 1,791,728 $ 1,749,030
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable $ 94,478 $ 84,640
Accrued payroll and related liabilities 34,785 40,162
Taxes payable 4,226 5,389
Deferred revenue 175,307 172,408
Current portion of long-term debt 6,250 6,250
Other accrued liabilities 78,479 77,744
Total current liabilities 393,525 386,593
Non-current liabilities
Long-term deferred revenue 82,101 87,467
Taxes payable 11,745 12,419
Deferred taxes 117 149
Long-term debt 237,500 242,188
Other non-current liabilities 47,651 43,849
Total liabilities 772,639 772,665
Stockholders’ equity 1,019,089 976,365
Total liabilities and stockholders’ equity $ 1,791,728 $ 1,749,030

POLYCOM, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

Nine Months Ended
September 30,

2014

September 30,

2013

Cash flows from operating activities:
Net income (loss) $ 21,577 $ (16,107 )
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 43,201 49,607
Amortization of purchased intangibles 9,724 11,335
Amortization of capitalized software development costs for products to be sold 1,269 47
Amortization of debt issuance costs 400 52
Amortization of discounts and premiums on investments, net 1,440 1,323
Provision for doubtful accounts 600
Write-down of excess and obsolete inventories 3,682 5,625
Stock-based compensation expense 34,178 53,300
Excess tax benefits from stock-based compensation expense (2,595 ) (780 )
Loss on disposal of property and equipment 4,987 3,658
Net gain on sale of discontinued operations (459 )
Changes in assets and liabilities, net of effects of acquisitions:
Trade receivables 1,432 21,857
Inventories 1,678 (13,346 )
Deferred taxes (7,705 ) 2,058
Prepaid expenses and other assets (11,974 ) (18,915 )
Accounts payable 8,867 (1,118 )
Taxes payable 7,178 (4,006 )
Other accrued liabilities and deferred revenue (3,290 ) 24,661
Net cash provided by operating activities 114,649 118,792
Cash flows from investing activities:
Purchases of property and equipment (36,847 ) (40,704 )
Capitalized software development costs for products to be sold (3,069 ) (1,089 )
Purchases of investments (220,575 ) (202,268 )
Proceeds from sale of investments 40,709 21,802
Proceeds from maturities of investments 132,753 185,634
Net cash received from sale of discontinued operations 556
Net cash paid in purchase acquisitions (7,974 )
Net cash used in investing activities (87,029 ) (44,043 )
Cash flows from financing activities:
Proceeds from issuance of common stock under employee option and stock purchase plans 23,407 23,326
Proceeds from debt, net of debt issuance costs 247,582
Payments on debt (4,688 )
Purchase and retirement of common stock (35,240 ) (110,816 )
Excess tax benefits from stock-based compensation expense 2,595 780
Net cash provided by (used in) financing activities (13,926 ) 160,872
Net increase (decrease) in cash and cash equivalents 13,694 235,621
Cash and cash equivalents, beginning of period 392,629 477,073
Cash and cash equivalents, end of period $ 406,323 $ 712,694

Certain prior period amounts have also been reclassified to conform to the current period presentation.

POLYCOM, INC.

Selected Summary Data

(In millions except per share amounts and headcount)

(Unaudited)

September 30,

2014

June 30,

2014

September 30,

2013

Balance Sheet Highlights
Cash and investments $ 643 $ 640 $ 954
Number of shares outstanding 136 137 170
Cash and investments per share $ 4.71 $ 4.68 $ 5.60
Debt $ 244 $ 245 $ 250
Operating cash flow – quarterly $ 34 $ 62 $ 36
Operating cash flow – trailing 12 months $ 164 $ 167 $ 183
DSO (Days Sales Outstanding) 49 49 47
Inventory turns – GAAP 5.7 5.2 5.3
Inventory turns – non-GAAP 5.6 5.1 5.1
Deferred revenue $ 257 $ 259 $ 260
Share repurchases:
Quarter-to-date share purchases – shares 1.9 1.5 1.7
Quarter-to-date share repurchases – dollars $ 25 $ $ 18
Year-to-date share purchases – shares (1) 3.4 1.5 9.8
Year-to-date share repurchases – dollars $ 25 $ $ 102
Remaining authorization for share repurchases (2) $ 175 $ $ 400
Ending headcount 3,528 3,558 3,789
For the Three Months Ended
September 30,

2014

June 30,

2014

September 30,

2013

Income Statement Highlights
GAAP:
Revenues $ 336 $ 332 $ 336
Gross margin 58.6 % 58.8 % 58.0 %
Operating expenses $ 178 $ 183 $ 217
Operating margin 5.7 % 3.6 % -6.6 %
Diluted EPS $ 0.12 $ 0.06 $ (0.14 )
Non-GAAP:
Revenues $ 336 $ 332 $ 336
Gross margin 59.4 % 59.5 % 59.0 %
Operating expenses $ 161 $ 159 $ 173
Operating margin 11.5 % 11.6 % 7.7 %
Diluted EPS $ 0.22 $ 0.21 $ 0.11

(1) Year-to-date share repurchases include final settlement of shares under prior Accelerated Share Repurchase program completed in the three month period ended June 30, 2014 for which funds were advanced in the three month period ended December 31, 2013.

(2) Polycom is not obligated to purchase any specific number of shares under its Share Repurchase Program and the program may be modified, suspended or discontinued at any time.

POLYCOM, INC.

Reconciliations of GAAP Measures to Non-GAAP Measures

(In thousands)

(Unaudited)

Three Months Ended Nine Months Ended
September 30,

2014

September 30,

2013

September 30,

2014

September 30,

2013

GAAP cost of revenues used in inventory turns $ 139,016 $ 141,417 $ 412,352 $ 424,708
Stock-based compensation expense (1,770 ) (2,165 ) (4,992 ) (6,852 )
Effect of stock-based compensation expense on warranty rates (204 ) (120 ) (410 ) (421 )
Amortization of purchased intangibles (732 ) (1,248 ) (2,304 ) (3,744 )
Non-GAAP cost of revenues used in inventory turns $ 136,310 $ 137,884 $ 404,646 $ 413,691
GAAP gross profit $ 196,670 $ 195,044 $ 583,877 $ 595,739
Stock-based compensation expense 1,770 2,165 4,992 6,852
Effect of stock-based compensation expense on warranty rates 204 120 410 421
Amortization of purchased intangibles 732 1,248 2,304 3,744
Non-GAAP gross profit $ 199,376 $ 198,577 $ 591,583 $ 606,756
Non-GAAP gross margin 59.4 % 59.0 % 59.4 % 59.5 %
GAAP sales and marketing expense $ 97,953 $ 107,292 $ 289,757 $ 325,663
Stock-based compensation expense $ (4,673 ) (5,889 ) (10,397 ) (19,742 )
Non-GAAP sales and marketing expense $ 93,280 $ 101,403 $ 279,360 $ 305,921
Non-GAAP sales and marketing expense as percent of revenues 27.8 % 30.1 % 28.0 % 30.0 %
GAAP research and development expense $ 51,024 $ 54,220 $ 148,202 $ 164,782
Stock-based compensation expense (3,203 ) (3,669 ) (7,304 ) (12,578 )
Non-GAAP research and development expense $ 47,821 $ 50,551 $ 140,898 $ 152,204
Non-GAAP research and development expense as percent of

revenues

14.2 % 15.0 % 14.1 % 14.9 %
GAAP general and administrative expense $ 25,746 $ 28,468 $ 74,175 $ 76,461
Stock-based compensation expense (5,122 ) (5,479 ) (11,485 ) (14,128 )
Costs associated with CEO separation and related SEC

investigation

(960 ) (2,107 ) (1,951 ) (2,107 )
Non-GAAP general and administrative expense $ 19,664 $ 20,882 $ 60,739 $ 60,226
Non-GAAP general and administrative expense as percent of

revenues

5.9 % 6.2 % 6.1 % 5.9 %
GAAP total operating expenses $ 177,657 $ 217,393 $ 559,670 $ 612,491
Stock-based compensation expense (12,998 ) (15,037 ) (29,186 ) (46,448 )
Amortization of purchased intangibles (2,435 ) (2,487 ) (7,363 ) (7,535 )
Restructuring costs 2,631 (24,887 ) (36,887 ) (34,639 )
Litigation reserves and payments (3,130 ) (3,130 )
Transaction-related costs (39 ) (156 ) (3,411 )
Costs associated with CEO separation and related SEC

investigation

(960 ) (2,107 ) (1,951 ) (2,107 )
Non-GAAP total operating expenses $ 160,765 $ 172,836 $ 480,997 $ 518,351
Non-GAAP total operating expenses as percent of revenues 47.9 % 51.4 % 48.3 % 50.8 %
GAAP operating income $ 19,013 $ (22,349 ) $ 24,207 $ (16,752 )
Stock-based compensation expense 14,768 17,202 34,178 53,300
Effect of stock-based compensation expense on warranty rates 204 120 410 421
Amortization of purchased intangibles 3,167 3,735 9,667 11,279

Restructuring costs

(2,631 ) 24,887 36,887 34,639
Litigation reserves and payments 3,130 3,130
Transaction-related costs 39 156 3,411

Costs associated with CEO separation and related SEC investigation

960 2,107 1,951 2,107
Non-GAAP operating income $ 38,611 $ 25,741 $ 110,586 $ 88,405
Non-GAAP operating margin 11.5 % 7.7 % 11.1 % 8.7 %

POLYCOM, INC.

Summary of Stock-Based Compensation Expense

(In thousands)

(Unaudited)

Three Months Ended Nine Months Ended
September 30,

2014

September 30,

2013

September 30,

2014

September 30,

2013

Cost of product revenues $ 668 $ 686 $ 1,828 $ 2,252
Cost of service revenues 1,102 1,479 3,164 4,600
Stock-based compensation expense in total cost of revenues 1,770 2,165 4,992 6,852
Sales and marketing 4,673 5,889 10,397 19,742
Research and development 3,203 3,669 7,304 12,578
General and administrative 5,122 5,479 11,485 14,128
Stock-based compensation expense in operating expenses 12,998 15,037 29,186 46,448
Total stock-based compensation expense $ 14,768 $ 17,202 $ 34,178 $ 53,300

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