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Polycom Reports Strong Growth in Operating Performance on Revenues of $349 Million in Fourth Quarter 2014

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Polycom, Inc. (Nasdaq: PLCM) today reported fourth quarter 2014 revenues of $349 million, non-GAAP net income of $34 million and non-GAAP earnings per diluted share of 24 cents. GAAP net income for the fourth quarter was $20 million, or 15 cents per diluted share. A reconciliation of GAAP to non-GAAP results is provided in the tables at the end of this press release.

“I am pleased with the significant turnaround in our Company’s operating performance during 2014,” stated Peter Leav, President and Chief Executive Officer. “Polycom’s strategic pillars to drive profitable growth, optimize our cost structure, lead customer success, and build a culture of one winning team will continue to be foundational elements in how we run our business in 2015.”

“Operating margins grew significantly on both a quarterly and full year basis,” said Laura Durr, Chief Financial Officer and Executive Vice President. “Polycom also generated $91 million in operating cash flow and repurchased $25 million in common stock during the fourth quarter of 2014.”

On a comparative basis, consolidated financial results were:

($ in millions, except per share data) Q4 2014 Q3 2014 Q4 2013

Year-Over-Year
Change

Revenues $ 348.9 $ 335.7 $ 347.9
Non-GAAP Net Income $ 33.6 $ 30.7 $ 25.4 32 %
Non-GAAP EPS $ 0.24 $ 0.22 $ 0.16 50 %
GAAP Net Income (Loss) $ 20.5 $ 17.0 $ (2.0 ) 1140 %
GAAP EPS $ 0.15 $ 0.12 $ (0.01 ) 1600 %

On a geographic basis, consolidated revenues were comprised of:

($ in millions) Q4 2014 Q3 2014 Q4 2013

Year-Over-Year
Change

Americas $ 165.3 $ 166.4 $ 170.6

(3)

%

% of revenues 47 % 50 % 49 %
Europe, Middle East & Africa (EMEA) 93.7 84.0 89.2 5 %
% of revenues 27 % 25 % 26 %
Asia Pacific 89.9 85.3 88.1 2 %
% of revenues 26 % 25 % 25 %
Totals * $ 348.9 $ 335.7 $ 347.9

* may not foot due to rounding

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

($ in millions) Q4 2014 Q3 2014 Q4 2013

Year-Over-Year
Change

UC Group Systems $ 219.2 $ 217.3 $ 218.1 1 %
% of revenues 63 % 65 % 63 %
UC Personal Devices 66.6 60.1 62.1 7 %
% of revenues 19 % 18 % 18 %
UC Platform 63.1 58.3 67.7

(7)

%

% of revenues 18 % 17 % 19 %
Totals * $ 348.9 $ 335.7 $ 347.9

* may not foot due to rounding

In Q4 2014, Polycom generated a total of $91 million in operating cash flow. Operating cash flow on a trailing 12 month basis was $205 million. Cash and investments at the end of Q4 2014 totaled $688 million, of which approximately $293 million is located onshore. Net of existing debt, cash and investments at the end of Q4 2014 totaled $446 million.

Earnings Call Details

Polycom will hold a conference call today, January 22, 2015, at 5:00 p.m. ET/2:00 p.m. PT to discuss these fourth quarter 2014 financial results and guidance for the first quarter 2015. 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 1.800.381.7839 and for callers outside of the U.S. and Canada, by calling 1.212.231.2900. 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 21759155. 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 financial and operating performance, including profitable growth and optimization of our cost structure. 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 quarter ended September 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 www.polycom.com or connect with us on Twitter, Facebook and LinkedIn to learn more.

(c) 2015 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 Twelve Months Ended

December 31,
2014

December 31,
2013

December 31,
2014

December 31,
2013

Revenues:
Product revenues $ 252,593 $ 251,044 $ 960,726 $ 991,110
Service revenues 96,332 96,898 384,428 377,279
Total revenues 348,925 347,942 1,345,154 1,368,389
Cost of revenues:
Cost of product revenues 109,880 112,435 406,625 422,429
Cost of service revenues 37,913 38,475 153,520 153,189
Total cost of revenues 147,793 150,910 560,145 575,618
Gross profit 201,132 197,032 785,009 792,771
Operating expenses:
Sales and marketing 99,004 109,384 388,761 435,047
Research and development 48,293 51,250 196,495 216,032
General and administrative 25,711 20,141 99,886 96,602
Amortization of purchased intangibles 2,418 2,854 9,781 10,389
Restructuring costs 3,460 13,831 40,347 48,470
Litigation reserves and payments 3,130
Transaction-related costs 13 156 3,424
Total operating expenses 178,886 197,473 738,556 809,964
Operating income (loss) 22,246 (441 ) 46,453 (17,193 )
Interest and other income (expense), net
Interest expense (1,489 ) (1,481 ) (5,893 ) (3,217 )
Other income (expense) 627 (753 ) 2,455 (1,794 )
Interest and other income (expense), net (862 ) (2,234 ) (3,438 ) (5,011 )
Income (loss) from continuing operations before provision for (benefit from) income taxes 21,384 (2,675 ) 43,015 (22,204 )
Provision for (benefit from) income taxes 902 (706 ) 956 (3,669 )
Net income (loss) from continuing operations 20,482 (1,969 ) 42,059 (18,535 )
Gain from sale of discontinued operations, net of taxes 459
Net income (loss) $ 20,482 $ (1,969 ) $ 42,059 $ (18,076 )
Basic net income (loss) per share:
Net income (loss) per share from continuing operations $ 0.15 $ (0.01 ) $ 0.31 $ (0.11 )

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

Basic net income (loss) per share $ 0.15 $ (0.01 ) $ 0.31 $ (0.11 )
Diluted net income (loss) per share:
Net income (loss) per share from continuing operations $ 0.15 $ (0.01 ) $ 0.30 $ (0.11 )

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

Diluted net income (loss) per share $ 0.15 $ (0.01 ) $ 0.30 $ (0.11 )
Number of shares used in computation of net income (loss) per share:
Basic 135,785 151,158 136,801 167,272
Diluted 140,802 151,158 142,005 167,272

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 Twelve Months Ended

December 31,
2014

December 31,
2013

December 31,
2014

December 31,
2013

GAAP net income (loss) $ 20,482 $ (1,969 ) $ 42,059 $ (18,076 )
Gain from sale of discontinued operations, net of taxes (459 )
Amortization of purchased intangibles 3,149 8,471 12,816 19,750
Restructuring costs 3,460 13,831 40,347 48,470
Litigation reserves and payments 3,130
Transaction-related costs 13 156 3,424
Stock-based compensation expense 13,782 11,165 47,960 64,465
Effect of stock-based compensation on warranty rates 84 126 494 547

Costs associated with CEO separation and related SEC investigation

208 802 2,159 2,909
Income tax effect of non-GAAP exclusions (7,548 ) (7,053 ) (29,093 ) (27,141 )
Non-GAAP net income $ 33,617 $ 25,386 $ 120,028 $ 93,889
GAAP net income (loss) per share
Basic $ 0.15 $ (0.01 ) $ 0.31 $ (0.11 )
Diluted $ 0.15 $ (0.01 ) $ 0.30 $ (0.11 )
Non-GAAP net income per share
Basic $ 0.25 $ 0.17 $ 0.88 $ 0.56
Diluted $ 0.24 $ 0.16 $ 0.85 $ 0.55
Number of shares used in computation of net

income (loss) per share:

Basic 135,785 151,158 136,801 167,272
Diluted 140,802 155,310 142,005 171,008

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)

December 31,
2014

December 31,
2013

ASSETS
Current assets
Cash and cash equivalents $ 443,132 $ 392,629
Short-term investments 185,783 134,684
Trade receivables, net 169,400 183,369
Inventories 100,328 103,309
Deferred taxes 38,805 37,085
Prepaid expenses and other current assets 61,072 50,352
Total current assets 998,520 901,428
Property and equipment, net 109,195 115,157
Long-term investments 59,197 56,372
Goodwill and purchased intangibles, net 583,798 596,918
Deferred taxes 54,019 51,398
Other assets 26,493 27,757
Total assets $ 1,831,222 $ 1,749,030
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable $ 108,172 $ 84,640
Accrued payroll and related liabilities 42,901 40,162
Taxes payable 4,056 5,389
Deferred revenue 173,532 172,408
Current portion of long-term debt 6,250 6,250
Other accrued liabilities 86,193 77,744
Total current liabilities 421,104 386,593
Non-current liabilities
Long-term deferred revenue 89,366 87,467
Taxes payable 11,719 12,419
Deferred taxes 173 149
Long-term debt 235,938 242,188
Other non-current liabilities 49,189 43,849
Total liabilities 807,489 772,665
Stockholders’ equity 1,023,733 976,365
Total liabilities and stockholders’ equity $ 1,831,222 $ 1,749,030

POLYCOM, INC.

Condensed Consolidated Statements of Cash Flows

(In thousands)

(Unaudited)

Twelve Months Ended

December 31,
2014

December 31,
2013

Cash flows from operating activities:
Net income (loss) $ 42,059 $ (18,076 )
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 57,412 64,779
Amortization of purchased intangibles 12,891 19,825
Amortization of capitalized software development costs for products to be sold 1,704 196
Amortization of debt issuance costs 533 178
Amortization of discounts and premiums on investments, net 1,964 1,816
Provision for doubtful accounts 600
Write-down of excess and obsolete inventories 6,532 7,390
Stock-based compensation expense 47,960 64,465
Excess tax benefits from stock-based compensation expense (3,371 ) (920 )
Loss on disposal of property and equipment 5,007 5,859
Net gain on sale of discontinued operations (459 )
Changes in assets and liabilities, net of effects of acquisitions:
Trade receivables 13,479 13,809
Inventories (3,551 ) (10,739 )
Deferred taxes (17,792 ) (14,332 )
Prepaid expenses and other assets (8,456 ) (637 )
Accounts payable 19,006 (5,184 )
Taxes payable 9,825 (5,848 )
Other accrued liabilities and deferred revenue 19,624 46,320
Net cash provided by operating activities 205,426 168,442
Cash flows from investing activities:
Purchases of property and equipment (50,133 ) (53,042 )
Capitalized software development costs for products to be sold (4,807 ) (2,165 )
Purchases of investments (269,842 ) (228,238 )
Proceeds from sale of investments 45,492 45,467
Proceeds from maturities of investments 168,328 237,499
Net cash received from sale of discontinued operations 556
Net cash paid in purchase acquisitions (7,974 )
Net cash used in investing activities (110,962 ) (7,897 )
Cash flows from financing activities:
Proceeds from issuance of common stock under employee option and stock purchase plans 23,729 23,326
Proceeds from debt, net of debt issuance costs 247,349
Payments on debt (6,250 ) (1,562 )
Purchase and retirement of common stock (64,811 ) (515,022 )
Excess tax benefits from stock-based compensation expense 3,371 920
Net cash used in financing activities (43,961 ) (244,989 )
Net increase (decrease) in cash and cash equivalents 50,503 (84,444 )
Cash and cash equivalents, beginning of period 392,629 477,073
Cash and cash equivalents, end of period $ 443,132 $ 392,629

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)

December 31,
2014

September 30,
2014

December 31,
2013

Balance Sheet Highlights
Cash and investments $ 688 $ 643 $ 584
Number of shares outstanding 135 136 135
Cash and investments per share $ 5.09 $ 4.71 $ 4.32
Debt $ 242 $ 244 $ 248
Operating cash flow – quarterly $ 91 $ 34 $ 50
Operating cash flow – trailing 12 months $ 205 $ 164 $ 168
DSO (Days Sales Outstanding) 44 49 48
Inventory turns – GAAP 5.9 5.7 5.8
Inventory turns – non-GAAP 5.8 5.6 5.5
Deferred revenue $ 263 $ 257 $ 260
Share repurchases:
Quarter-to-date share purchases – shares 1.9 1.9 35.4
Quarter-to-date share repurchases – dollars $ 25 $ 25 $ 400
Year-to-date share purchases – shares (1) 5.3 3.4 45.2
Year-to-date share repurchases – dollars $ 50 $ 25 $ 502
Remaining authorization for share repurchases (2) $ 150 $ 175 $
Ending headcount 3,525 3,528 3,774
For the Three Months Ended

December 31,
2014

September 30,
2014

December 31,
2013

Income Statement Highlights
GAAP:
Revenues $ 349 $ 336 $ 348
Gross margin 57.6 % 58.6 % 56.6 %
Operating expenses $ 179 $ 178 $ 197
Operating margin 6.4 % 5.7 %

(0.1)

%

Diluted EPS $ 0.15 $ 0.12 $

(0.01)

Non-GAAP:
Revenues $ 349 $ 336 $ 348
Gross margin 58.4 % 59.4 % 58.8 %
Operating expenses $ 161 $ 161 $ 171
Operating margin 12.3 % 11.5 % 9.8 %
Diluted EPS $ 0.24 $ 0.22 $ 0.16

(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 Twelve Months Ended

December 31,
2014

December 31,
2013

December 31,
2014

December 31,
2013

GAAP cost of revenues used in inventory turns $ 147,793 $ 150,910 $ 560,145 $ 575,618
Stock-based compensation expense (1,764 ) (1,892 ) (6,756 ) (8,744 )
Effect of stock-based compensation expense on warranty rates (84 ) (126 ) (494 ) (547 )
Amortization of purchased intangibles (731 ) (5,617 ) (3,035 ) (9,361 )
Non-GAAP cost of revenues used in inventory turns $ 145,214 $ 143,275 $ 549,860 $ 556,966
GAAP gross profit $ 201,132 $ 197,032 $ 785,009 $ 792,771
Stock-based compensation expense 1,764 1,892 6,756 8,744
Effect of stock-based compensation expense on warranty rates 84 126 494 547
Amortization of purchased intangibles 731 5,617 3,035 9,361
Non-GAAP gross profit $ 203,711 $ 204,667 $ 795,294 $ 811,423
Non-GAAP gross margin 58.4 % 58.8 % 59.1 % 59.3 %
GAAP sales and marketing expense $ 99,004 $ 109,384 $ 388,761 $ 435,047
Stock-based compensation expense (4,496 ) (6,828 ) (14,893 ) (26,570 )
Non-GAAP sales and marketing expense $ 94,508 $ 102,556 $ 373,868 $ 408,477
Non-GAAP sales and marketing expense as percent of revenues 27.1 % 29.5 % 27.8 % 29.9 %
GAAP research and development expense $ 48,293 $ 51,250 $ 196,495 $ 216,032
Stock-based compensation expense (2,995 ) (3,056 ) (10,299 ) (15,634 )
Non-GAAP research and development expense $ 45,298 $ 48,194 $ 186,196 $ 200,398

Non-GAAP research and development expense as percent of revenues

13.0 % 13.9 % 13.8 % 14.6 %
GAAP general and administrative expense $ 25,711 $ 20,141 $ 99,886 $ 96,602
Stock-based compensation expense (4,527 ) 611 (16,012 ) (13,517 )

Costs associated with CEO separation and related SEC investigation

(208 ) (802 ) (2,159 ) (2,909 )
Non-GAAP general and administrative expense $ 20,976 $ 19,950 $ 81,715 $ 80,176

Non-GAAP general and administrative expense as percent of revenues

6.0 % 5.7 % 6.1 % 5.9 %
GAAP total operating expenses $ 178,886 $ 197,473 $ 738,556 $ 809,964
Stock-based compensation expense (12,018 ) (9,273 ) (41,204 ) (55,721 )
Amortization of purchased intangibles (2,418 ) (2,854 ) (9,781 ) (10,389 )
Restructuring costs (3,460 ) (13,831 ) (40,347 ) (48,470 )
Litigation reserves and payments (3,130 )
Transaction-related costs (13 ) (156 ) (3,424 )

Costs associated with CEO separation and related SEC investigation

(208 ) (802 ) (2,159 ) (2,909 )
Non-GAAP total operating expenses $ 160,782 $ 170,700 $ 641,779 $ 689,051
Non-GAAP total operating expenses as percent of revenues 46.1 % 49.1 % 47.7 % 50.4 %
GAAP operating income (loss) $ 22,246 $ (441 ) $ 46,453 $ (17,193 )
Stock-based compensation expense 13,782 11,165 47,960 64,465
Effect of stock-based compensation expense on warranty rates 84 126 494 547
Amortization of purchased intangibles 3,149 8,471 12,816 19,750
Restructuring costs 3,460 13,831 40,347 48,470
Litigation reserves and payments 3,130
Transaction-related costs 13 156 3,424

Costs associated with CEO separation and related SEC investigation

208 802 2,159 2,909
Non-GAAP operating income $ 42,929 $ 33,967 $ 153,515 $ 122,372
Non-GAAP operating margin 12.3 % 9.8 % 11.4 % 8.9 %

POLYCOM, INC.

Summary of Stock-Based Compensation Expense

(In thousands)

(Unaudited)

Three Months Ended Twelve Months Ended

December 31,
2014

December 31,
2013

December 31,
2014

December 31,
2013

Cost of product revenues $ 635 $ 640 $ 2,463 $ 2,892
Cost of service revenues 1,129 1,252 4,293 5,852
Stock-based compensation expense in total cost of revenues 1,764 1,892 6,756 8,744
Sales and marketing 4,496 6,828 14,893 26,570
Research and development 2,995 3,056 10,299 15,634
General and administrative 4,527 (611 ) 16,012 13,517
Stock-based compensation expense in operating expenses 12,018 9,273 41,204 55,721
Total stock-based compensation expense $ 13,782 $ 11,165 $ 47,960 $ 64,465

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