Q1 2021 Plantronics Inc Earnings Call
Well you can get something for standby and welcome to the poll, we quarterly earnings call. At this time all participants are in listen only mode. After the speaker's remarks, there will be question and answers.
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I'd now like Sandy conference over to Mike I Bird. Thank you Sir Please go ahead.
Thank you operator, welcome to Polys financial results conference call for the first quarter fiscal year 2021, My name as Mike Heiberg head of Investor Relations and joining me today, our Bob Haggerty Chairman of the board, an interim CEO and Chuck Boynton Executive Vice President and CFO.
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The information presented and discussed today include forward looking statements, which are made under the safe Harbor provisions of the private Securities Litigation Reform Act up 1995.
The risks and uncertainties related to such statements are detailed in our most recent 10-Q 10-K in today's press release and earnings presentation.
Throughout todays remarks, we will refer to specific slides for Q1.
Why 21 earnings presentation.
Unless otherwise noted all comparisons discussed today will be to the same quarter over prior year.
You should also refer to the materials, we provide today for an explanation of the non-GAAP financial measures discussed on this call along with a reconciliation of those measures to the nearest applicable GAAP measures.
These non-GAAP measures are indicators that management uses to provide additional muni some meaningful comparisons.
Between current results and previously reported results and as the basis for planning a forecast in future periods. All arm at our earnings materials are posted on our Investor Relations Web site at Investor Dot Polys Dot com with that I went out from the call over to Bob.
Thanks, Mike and thanks, everyone for joining us today.
We spent the last two quarters focused on improvements needed to realize the benefits of the integrated company.
And returned to profitable growth.
We reviewed reviewed our systems processes resource allocation to ensure we focus on the customer and areas. We believe will provide the best return.
This last quarter, we modified our product road map as the market and demand has shifted made progress on our internal systems and tools improve communication with our channel partners and strengthen relationships with several strategic partners.
Well not always visible from the outside step by step, we're making progress on the transformation necessary to become the endpoint provider of choice for the unified communications industry.
The pandemic has created a series of challenges, but has also created opportunities for us and our industry.
It's clear that hybrid working trends are here to stay.
Market research firms estimate.
30% to 40% of employees around the World will continue to work from home with many adopting a flexible work schedule splitting their time between the office at home.
As a result, the forecasted growth rate for headset and video markets has increased offsetting the impact to the voice market.
The net effect of this hybrid work environment is it increased Tam.
On a long term growth opportunity for our company, which we are working aggressively to capitalize on.
Turning to the most recent quarter on page five headsets continue to sell well.
Our new video bars are ramping and voice solutions remain challenged.
Our operations team continues to work through supply chain challenges.
Backlog remains unusually high as new orders continue to flow in at a brisk pace.
Revenue was slightly stronger than expected and aggressive cost controls and lower expenses allowed us to deliver earnings above the high end of our guidance range.
We exited the June quarter with approximately five weeks of backlog and a very strong cash position.
I'll, let Chuck walk through the results in greater detail.
[noise] Coburn 19 continues to impact our supply chain and overall business.
Well the lack of employees in offices is impacting voice demand hits it demands remain elevated.
This is put additional pressure on our supply chain.
Our factory in Mexico is capable of running at full capacity, but we were having to flex our production based on component availability.
It is a similar situation to our contract manufacturers. However, our headset availability availability in the market continues to improve.
Outside of manufacturing, we began moving a small number of employees back into certain offices. However, as of today most employees continue to work from home.
I'd like to pick a few minutes and discuss the progress we've made on a strategic partner front.
Our relationship with Microsoft is strong and getting stronger.
Recently completed team certification on our studio X 30, and X 50 video bars and today offer the largest portfolio of teams certified solutions.
In addition in May we launched a new family of Microsoft teams rooms also known as MTR.
These solutions bundle, our audio and video endpoints with an enterprise class appliance to deliver superior meeting experience for Microsemi, Microsoft teams users.
Our zoom relationship continues to strengthen in June we announced that the studio ex 30 X 50, and GE 7500, where the first appliances to receive zoom certification and in July we joined zooms hardware as a service program, where we represent more than half of the available and points.
On the last week, we expanded our relationship with log me in our studio at 30 and X 50 video bars are now available and it go to room bundled solutions.
As you can see many of these recent partnership enhancements involved the studio ex 30, Nx 50, that's because the onboard compute capabilities allow users to run specific applications directly on our device without the need for a separate computer in the room simplifying deployments in reducing cost.
Let me wrap up by saying, we have a lot more work to do but each quarter. We make progress we continue to improve our go to market execution, we have an exciting protein product roadmap.
For the balance of the year and even in the current environment, we've been able to improve our financial condition as we strengthen our partnerships and bring industry leading products to market. We are positioned to capitalize on the accelerated growth opportunity the headset and video market presents.
Lastly, our board continues to make progress on the CEO search and we look forward to providing you with an update in the future I'll now turn the call over to Chuck to discuss our financial results.
Thanks, Bob although the business is down both sequentially and year over year, we performed largely as expected.
We're particularly pleased with the strong operating cash flow ending the quarter with 263 million of cash an increase of 37 million.
As Bob mentioned, the concentrated nature of demand continues to be a supply chain challenge, we exited the quarter with approximately five weeks of backlog primarily in headsets. This was down from six weeks last quarter, but above our operating model.
To address the elevated demand we have added additional truly capacity increased our dual sourcing and insourced. Some high volume skews into our manufacturing facility in Mexico, where we have added additional production lines.
However, based on the inflow of new orders through the first several weeks of fiscal Q2, we do not expect to entirely clear the backlog by the end of this quarter.
Overall channel inventory declined again, this quarter and remains below targeted levels for headsets, we expect us to normalize in Q2 in Q3 as additional supply comes online.
Turning to the financial guidance summary on page 16.
Revenue of 361 million was in the upper half of the guidance range gross margins were inline with expectations and operating expenses were lower than anticipated, resulting in EBITDA and EPS above the top end of the guidance range.
Page 17 breaks down revenue by product category and region.
Total headset revenue was up sequentially, but down year over year within headsets, you see grew significantly both year over year and sequentially, but was partially offset by declines in contact center.
Video revenue increased both sequentially and year over year as our new video bars continue to ramp.
Our voice business was down significantly as work from home impacted desktop phone and audio conferencing deployments.
Services revenue declined modestly.
Turning to page 18.
We've included a new slide with trended sales out data for our new video portfolio. This captures our new video offering including all three video bars, plus the GE 7500, although not directly comparable to our reported revenue sales out of this next gen portfolio is roughly.
One third of our total video revenue.
On page 19, similar to the prior quarter gross margins were impacted by factory under utilization and freight.
In addition, this quarter, we had higher inventory provisions and warranty reserves.
As our business stabilizes, we expect modest gross margin expansion.
Operating expenses decreased 27 million from the prior year, primarily due to cost controls and lower expenses, while people work from home.
Lastly, we expect operating expenses to increase modestly from our Q1 results.
Moving to page 21.
Continued working capital improvements drove strong operating cash flow of 42 million in the quarter, pushing cash and short term investments to 263 million.
We have been accumulating cash over the past couple of quarters in abundance of caution as the pandemic has impacted the global economy.
Due to working capital requirements, we expect cash the decline in Q2, however, as the economy stabilizes and our business outlook improves we expect to resume de levering.
On page 22, you can see we posted EBITDA of 48 million in the quarter, resulting in a trailing 12 month EBITDA of 243 million.
Turning to guidance on page 24.
Before I walk through the numbers I'd like to offer some context for our fiscal Q2 guidance as you may have gathered headset supply and voice demand our primary issues. Our guidance is based on the current supply forecast for enterprise headsets from both our factory in Mexico, and our contract manufacturers with that understand.
Funding, we expect to GAAP net revenues of 346 to 386 million.
Non-GAAP net revenue of 350 to 390 million.
Total adjusted EBITDA is expected to be in the range of 45 to 65 million.
And non-GAAP EPS is expected to be in the range of 25 to 65 cents per share.
Finally, I'd like to mention that these guidance ranges assume our factory and supply chain remain in production for the balance of fiscal Q2.
With that I'll turn the call over to the operator to begin the Q.
Peter.
As a reminder to ask a question you will need to press star one on your telephone keypad and wait for it you need to be announce again, that's star one to ask a question.
Your first question comes from the line, that's a Marshall Morgan Stanley Your line standpoint.
Great. Thanks, maybe the first question.
On the zoom a hardware as a sale opportunity clearly that's that's a meaningful opportunity you know how should we think about that program. How you guys are thinking about that product ramping the availability of being able to ramp the X series product that would go along with that and any margin impact we should be.
Aware of.
Well I guess you Bob I'll take the margin part first dislike for us it will be accounted for as our traditional sale. So cash up front and are expected to be margin accretive to the company overall, because the new video products generally are above company average margin and Bob can talk about the deeper.
Our relationship but zone.
I think the storm relationships in good shape, we have as you as we've said in the script.
Got it both the Xthirty ecfifty in the.
The GE 7500 certified.
We've got a number of other products that are lining up for that that offer. So I don't I don't see because its focused primarily in video and to some extent voice don't see any supply constraints and how that will ramp up but it's included in any forward guidance and aggregated.
Into the.
As this program ramps up.
Got it and just and it may have just been from an older corridor, but I thought manufacturing of X 30, and X 50 products were fairly limited upfront just a sense of how we should be thinking of the ramp of a production capability on that throughout the years or a set amount there couldn't come on per quarter.
Or are we passed kind of a supply constraints.
Yes, so we're past supply constraints I mean, I think a couple of quarters ago, we talked about the normal ramp of of equipment and so we had been on a a pretty good clip of increasing production capacity of X 30 next 50 as the product ramps to market and so at this point where now.
Got a supply constrained, but we're ramping sort of just according to plan.
Okay got it that's helpful. Thanks, Chris.
Thanks meta operator next question.
Your next question comes from the line.
Mike Latimore with Northland capital markets Your line.
Great. Thanks.
Great profit during the quarter there.
Oh in terms of that's the phone business or are you thinking about that improving when kind of people going up but go back to work is that the main lever there as or something else that would help.
I think that's the prime this Bob I think that's the primary driver when people returned to work, we expect that to to move back up to where we weren't and potentially start to recapture the growth.
That we saw look.
The.
The business is certainly down and and Weve described it fairly.
Carefully in our our script. So I think it is definitely tied to how how people come back to work.
Okay and then on the video side. That's the studios are growing nicely is that mostly in office deployments or some of that kind of home environment.
I think it depends on the region. So we have some of our products do work for home. One notable product we have a product called the eagleeye, many and it's up materially it's up it's webcam personal webcam, but very professional oriented one.
So we are seeing the work from home and and we are seeing that we are able to move product both to enterprise where people are back to work or enterprise, who are facilitating it for.
Work from home employees and then we are seeing it also move a one off as individuals are buying it.
And just last question on supply in the June quarter, you I think you had two weeks, where your plants are actually I believe shut down.
How would you compared the supply can trade.
In the September quarter versus the second quarter doesn't yeah can have the kind of the plants being shutdown.
And the September quarter.
Yes, Thats right, Mike Yeah in the in the June quarter. Unfortunately, our our Mexico factory was offline for two four weeks and then it took a while to ramp back up so effective production was.
Less than three or four weeks of output or three or four weeks of output was impacted so yeah. We're we've reconfigured the factory for the health and safety of all our employees and we're running with the ability to run at full capacity right now, but we have a component shortages. So I would be we expect as contemplated in our.
And that that business will be up in the September quarter, assuming that there's no other disruptions, but the bottleneck or constraint right now as we talked about in the prepared remarks is really a component shortages, but otherwise we expect higher volumes.
This quarter, partially clear more of the backlog, we cleared a little bit of the backlog in the June quarter will clear more of it in the September quarter, but we don't think that we'll be out of the woods entirely and that will still have a more than modeled backlog going into the December quarter journey.
Okay. Thank you.
Thank you Mike.
Operator next question.
Your next question comes from the line, Greg Burns lead CD key and company your line now.
Just following up on the.
Play a chain issues can you quantify what that.
What the impact that is to revenue and your guidance.
Well I think you can you know we haven't.
Sort of outlined the exact numbers, but we did indicate a last quarter, we had effectively five weeks of backlog and this quarter. We ended with about a six weeks last quarter in the June quarter. We ended with five weeks of backlog and we probably won't clear all that so we haven't provided the exact numbers, but you can sort of do the math and get an idea of what the.
A range is of backlog in the backlog is primarily higher runner.
You see headset products that are that we're experiencing in backlog.
Okay and would you characterize the component shortages as like an industry wide issue or is this specific to some of your headsets I'm just trying to get a sense of.
Yes.
Missing some opportunity here or this is.
More of an industry issue where.
I was kind of suffering the same supply chain constraints.
So we have a small number of single source components that are difficult to obtain in volumes.
As the as the volume shifted those are the pump warrants that popped up.
In some cases there are parts that are used bye bye.
By others, but in some cases, they're not so they're just it's just a foundries b and suppliers being able to ramp.
As this demand shifted.
And if it shifted fairly dramatically so we're working through it.
Okay.
And lastly, you mentioned modifying your product road map given the shift you're seeing in the market could you just give us maybe a little bit more color on.
And what you're doing in terms of your product portfolio. Thank you.
I mean in a in a.
30000 foot view.
We slowed down some of the resources that we applied to large conference room work and applied them to work from home platforms.
And it's primarily in video and then personal voice not headsets.
Okay, So lower price point personal.
Video and point more work more things that were would apply to work from home.
So kind of away from Big conference room towards work from home and its voice and video, but voice it personal voice not.
Well, we have plenty of people work on handsets.
Alright, great. Thank you.
Thanks, Greg.
Once again, if he would like to ask a question. Please press star one on your telephone keypad in Greek fully they need to be enhance your next question comes from delight, Paul Coster with JP Morgan Your line Stan.
Yeah. Thanks for taking my question, whose like you're going to do some quarter ahead for the headset business.
No the reason because the backlog, but I mean are you able yet to discern what is.
Onetime in nature of this is what is more enduring and nature as people would send to the office fluid taking the headset. We've been more do you expect him to see this was a second the headset.
I'm just.
Trying to figure out what is short term in nature here, most might be longer as a trend.
Well, let's talk about what we know what we think we know about the with the market's doing in the near term the knee jerk was everybody's out of the office and that's clearly where we are for the most part right now in the future we expect that hybrid will become.
A large portion of the workforce. So people will work part time at home and part time in the office at some level people will carry their headset in in some level that they'll have to I'd say, that's a little unclear just yet, but we are seeing strong demand for.
For headsets, and we don't see it abating in the short term.
Got you and then on the video from I mean, you know I'm just trying to understand this looks or is there more on here then you got huddle rooms, which are driving much of the studio demand and well human beings I'm really supposed to be huddling anywhere at the moment. So what was happening what what does it end supplies Assembly is doing a that's what drives it tomorrow.
So that product.
So we're seeing two kinds of things happened first off we have some of the some of our products that are termed huddle room, which is just just on you know kind of a category that they've been put in arc are capable of working in an office or working at and a home environment. Certainly if you go to the Tele medicine, well probably more so did.
Distance learning.
Teachers for example might use some of our low end video bars in that environment without a large screen. So they are applicable to work from home I think video is it's going to be pervasive. It's pervasive now it'll be pervasive in the future. So we don't see that shifting away from it.
Okay got it thanks.
Thanks, Paul.
Your next question comes from the line at the elder with Wells Fargo. Your line is now.
Hey, good afternoon. Thanks for taking the questions I had a follow up on the zoom hardware as a service you know they they and their announcements they talked about partnering with what's DTN and with a need to making an investment there. So could you could you just talked about you know are you guys position.
Is there kind of enterprise partner and another one is kind of more focused on the home or like how each of you.
What little niche or you carving out and then back to the earlier question on.
Any kind of revenue impact or anything like that it sounds like you are still just selling those as you typically would but who's the end buyer is assumed the actual end buyer, who who or does that reside.
Yes, certainly David Thanks for the question so.
I would not characterized our participation is as a niche I. Thank you know I assume is playing in a very large ecosystem. They have a lot of daily users.
Significant opportunity and we have 50% of the skews available on their website and the hardware as a service model, our our skews and so I think that we've got a a big share of those certainly they did make an investment and a in need and I think you know theres a it's a it's a very large market and there will be law.
It's a players and we think that will differentiate our technology with our great hardware and great designs and more importantly, with the software layer interconnecting all of our applications together that we think will help drive.
Companies and individuals to buy more.
Multiple products of ours, because they'll work better together.
So I think that you know the the the zoom opportunity is a great. When we're excited to work with them in terms of through takes the risk on that for us it's treated as a cash sale I don't know whats zoom has a third party who is providing the the financing or if that's on their balance sheet, but for for us it's going through it.
It's a normal cash sale to us through our channel partners and so it's a more excited to work with them and there's a lot of great opportunity.
[noise], Okay, Great and then you know for me, that's obviously, great, but they've got the investment presume, but I did wonder if that's something that you guys would consider as well have you had conversations with zoom about in a sort of a deeper integration maybe financial investment.
Well, we certainly had discussions around deeper integration and there are a great partner as as Microsoft and walking in and others.
So in terms of taking investment that's not something that we've talked them about and I think at today's share price not something that we're you know looking for either.
Great I got two more questions on the on the backlog.
Can you just described what's happening you know for the folks that but can't get their hands on product.
From Plantronics are they going to you know other products or you know as backlog fairly consistent across the industry. It's just you know.
Customers aren't able to source product you know from anybody.
Well.
So there's two things that can happen one it can be on allocation and they'll work through.
With a long lead time rate extended lead time.
We have alternative products that are available sometimes deals are shifted to a product that we do have availability on and I can't speak to what's what's going on with our competitors I think.
Certainly anecdotally it looks like everybody has been impacted because of the sudden up shift in demand.
Okay, and then lastly, the sense for Chuck if you could just talk about obviously, you've only got one quarter of guidance, but we think about this year.
You know the potential you know cash flow generation for the year is there any anyway, you can help but help us bracket, you know where to drive our models or are you expecting you know positive free cash flow or over 100 million or in any way that you can help us to understand how to tie that together.
Oh, certainly as we said in the past that you know we expect this company.
Should generate significant positive operating cash flow, we had a great cash quarter over 40 mind ours of operating cash flow this quarter.
We we guided that we expect that to be lower next quarter, because just as a working capital profile, but we do expect material operating cash flow throughout the year. We did talk about starting to de lever once we have more confidence in the overall economy in the business outlook.
So I would you know in terms of or a range that we gave I think it was a couple of quarters ago. We set a 150 to 200 million of operating cash flow for the year I don't really see that that changing in that in that range, but it's we're not sort of officially provided guidance for the year, but we do yeah. This is a really good business and we.
We are optimistic that margins will tick up a little bit next quarter, certainly that's helped with the headset demand where margins are above company average and with the decline in voice those margins are lower than company average so that mix is helpful.
And then Opex you know weve the employees of the company done a phenomenal job, reducing costs and keeping costs and check and that's really helps to drive profitability and importantly drive operating cash flow for the year.
Great. Thank you so much.
Thanks, David.
Your next question concerning the mining they hate telling and can upping. Your line is open.
Hi, Thanks for taking my question actually most of my question has already been answered, but just talk a little bit on uses of cash going forward you mentioned de leveraging it sounds like that's gonna be a wait and see depending kind of macro environment.
So maybe you can talk about.
You know any headroom on or any issues regarding covenants or what kind of headwind you have there. Thanks.
Thank you Liz.
We don't have concerns on the covenants right now I, we've talked I think extensively about this in the past and so those are those we didn't really have a concern there in terms of of uses of cash you know the the at our level of EBITDA This quarter the guidance next quarter.
The uses of cash primarily going to be the final restructuring payments that we have and then and then de levering there aren't the capex is relatively modest we think thats kind of less than 10 million a quarter on average and so at the level of EBITDA is that we performed at that we've guided that there should be excess.
US cash to use to de lever.
Q2, maybe a little bit lower just because the profile of working capital and how we ended Q1, but for the year. We expect the cash generation to be you know a positive and the primary model for capital allocation will be to de lever.
Perfect. Thank you.
Thank you I suppose.
And you have a follow up question from Paul constantly keeping Morgan your line.
Oh, no I'm thinking so those who every question possible spin off thank you [laughter].
Thank you Paul.
Once again brand or anything like that.
Yes.
I think that wraps it up I don't see anybody else.
In the Q.
Great well, we will take this moment to tell everyone. Thank you for calling in thank you for your time and look forward to updating you all next quarter. Thank you bye bye.
[noise] leasing Incent them. This concludes today's conference call. Thank you for participating may now disconnect.
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