Tuesday June 3 was a significant date for Polycom for a couple of reasons. First, Polycom held its first industry analyst conference in about two years, meaning the company was finally able articulate a clear strategy to us industry watchers. Second, the day marked the six-month anniversary of Peter Leav's tenure as CEO. I saw Leav present at the company's channel event in February, but this was his first presentation to large number of industry analysts.
The company has certainly had its ups and downs over the past few years. Some felt Polycom would struggle to exist as a stand-alone organization in a market filled with vendors much larger than itself. I've even heard some question the long-term viability of the company as the video conferencing industry has come under fire recently with the market slowing down. Along with the ups and downs, the company strategy has also gone through several changes and needed more focus if Polycom was to turn the corner and get back on a path of consistent growth and solid financial performance.
The transition to Leav and subsequent shift in strategy was the primary reason the company had to delay the analyst event it had scheduled last year. The six-month mark provides an excellent opportunity to look at how the strategy has changed and measure whether the company is headed in the right direction--and I do believe Polycom has turned a corner.
From a shareholder perspective, Leav's tenure must be considered a success. In the past half-year, the company has improved it cost structure and stabilized its group system business, while the personal systems business unit has enjoyed a number of consecutive strong quarters of growth. The net result is improved operating margins, more interest from Wall Street and a stock price that's up 20%. The biggest driver of this stock growth has been opex improvements; I don't believe the company is yet being rewarded for growth opportunities ahead of it, but that will come with continued consistent performance.
I also think that Peter Leav gave Polycom clearer focus on what the company wants to be and how the products fit together. Polycom has long been known for its quality hardware products-- conference phones, video endpoints, telepresence systems and so on. However, there's been a certain industry mania around "software" over the past few years and Polycom, like so many other vendors, was claiming to be a software company. The fact is the company sells a ton of hardware, and that reality needs to fit into its overall strategy.
I was lucky enough to sit with Peter Leav at lunch, and he made it clear to me that there's nothing wrong with being a hardware company; the key is to understand the role of hardware, software and services. It's the combination of those elements that makes up a solution. I've been clear on this over the years in my own blogs-- if you want to build the best, high quality, high performance experience, you need to have some dedicated hardware in the mix.
During his opening to the analysts, Leav also discussed the strength the company has today in voice. Polycom is obviously known around the globe as a video leader, but the voice business has been on fire, according to Leav. Polycom has a great relationship with Microsoft and its Lync platform, and as Microsoft gets more aggressive pushing Lync Enterprise Voice, Polycom will be pulled along as well. From the research I've done, about 75% of customers who use Lync Voice use Polycom for endpoints.
In 2013, Microsoft lifted the restriction forcing vendors to follow strict guidelines on how to manufacture the phones. Historically, all vendor phones looked the same, so Polycom had a line of CX phones that looked a lot like phones one could purchase from any other SIP phone provider. The change allowed Lync customers to purchase the VVX line, which is loaded with differentiated features. This was important to Polycom, as they can now use their strength in engineering and video to stretch their lead over other SIP phone vendors. As an added benefit, these phones also enjoy about 5-10 points higher profit margin than the CX line.
However, while the business in Lync deployments is certainly an interesting story, it's not the bulk of Polycom's voice business. About 65% of Polycom's voice sales come from the hosted voice providers such as 8x8 and Ring Central. This market has exploded recently, and as cloud based voice becomes more widely adopted, I would expect this to be another driver of growth for Polycom. I'd like to see the company achieve greater balance around the globe in this business, and I'm guessing that will be a focus area for Polycom over the next couple of years.
The other area of opportunity that the company discussed in almost every session at the analyst conference was the video content management (VCM) business. I believe this topic came up in SVP of Worldwide Engineering, Ashan Willy's presentation, and he was clear that this is more than just save, store and retrieve for recorded videos.
VCM includes the integration of business applications, touch boards, white boards, Web browsers and other types of data. This is an area of growth that I feel strongly enough about, that I listed the convergence of voice, video and content as the #1 thing AVIs should be on the lookout for at next week's InfoComm event. Because of this, I'd like to see Polycom move into the digital signage business. Done right, digital signage has huge potential, but it needs to be delivered as part of a larger visual collaboration solution and not as a standalone product.
Lastly, Polycom has improved its solution selling capability. Lots of vendors talk about solution selling, but that often means just bundling SKUs together and selling the same way. Last year the company kicked off a "Defy Distance" campaign that raised the awareness of how video collaboration could change certain processes.
For example, Polycom targeted HR departments by pitching a solution for interviewing people remotely. Polycom EVP and CMO Jim Kruger spent a fair bit of time talking about the success of the campaign and how it has opened the door to a number of new buyers. The company had so much success with it that the campaign actually won the 2014 SiriusDecision ROI award. (Jim Kruger led a discussion at the recent SiriusDecisons conference with VP Corporate Marketing Nicole Hall, VP of EMEA Marketing Tim Stone and VP of Americas Marketing Maurizio Capuzzo to discuss the best practices regarding that campaign.)
Certainly a strong six months for new CEO Peter Leav, but there's certainly work to be done. The company seems to have its product direction set, and the focus shifts to channel. I'd like to see the company increase its sales flow through systems integrators and service providers. Also, Polycom still has a number of legacy channel partners that are good at selling video the old way but may not have the skills or the desire to shift their sales model and become more services focused. It's tough to leave channel partners behind, but sometimes the tough, uncomfortable decision is the best one.
One last point: Kudos to the AR team at Polycom (Tim Yankey and Nicole Hall) for the free flowing, roundtable type formats of the sessions. The company used a more open, discussion lead format rather than the traditional PowerPoint-centric event, and I thought it created greater dialogue. I'd certainly like to see other vendors adopt this style for analyst conferences.
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