Q2 2021 Plantronics Inc Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the Poly Q2 2021 earnings Conference call.
Welcome to Paulas financial results conference call for the second quarter fiscal year 2021.
My name is likely Berg head of Investor Relations and joining me today are Dave Shull, probably president and CEO and Chuck Boynton Executive Vice President and CFO.
The information presented and discussed today includes forward looking statements, which are made under the safe Harbor provisions of the private Securities Litigation Reform Act of 995, the risks and uncertainties related to such statements are detailed in our most recent 10-Q 10-K and today's press release and earnings presentation.
Throughout todays remarks, we will refer to specific slides from our Q2. That's why 21 earnings presentation. You should also refer to the materials. We provided today for an explanation of the non-GAAP financial measures discussed on todays call along with a reconciliation of those measures to the nearest applicable GAAP measures. These non-GAAP measures are indicate.
Matters that management uses to provide additional meaningful comparisons between current results and previously reported results and as a basis for planning and forecasting future periods.
All of our earnings materials are posted on our Investor Relations website at Investor thought poly Dot com with that I'll now turn the call over to Dave.
Thanks, Mike.
First I want to thank the pollo team for the warm welcome when I joined last month.
In particular I want to thank Bob Haggerty for his leadership as interim CEO prior to my joining.
Bob in the board, we're transparent on both the opportunities and challenges that poly.
I appreciate this clear I view the company, we are focused on executing a rapid turnaround and I'm very optimistic about the future of poly.
The World has changed for all of US the shifts to work from home continues to drive demand for our headsets. While our next Gen video solutions are selling well ahead of expectations of course as a counterbalance demand for office phones remains soft.
We have increased our supply chain capacity to ship a record number of headsets in video units during the quarter. This.
This strong demand coupled with cost management allowed us to deliver revenue and profitability above the top end of the guidance ranges.
Based on the strength of the business, we have begun to put our accumulated cash to work retiring $37 million of debt in the quarter.
This is just the beginning of what I believe will be an exciting turnaround for poly.
Before except in the CEO role I spend time looking at the company learning about the products and markets and getting an overview of the competitive landscape.
Polys history of innovation in professional grade audio and video products stretches back decades. After all we put the first headset on Neil Armstrong as you stepped onto the Moon.
I also remember well the first time I had an office with a polycom speaker phone I felt that I had arrived.
This is now day 50 for me and the last few weeks I've talked with many of our distributors resellers and major customers worldwide. It's.
It's clear that we fumbled some of the integration steps between plantronics and Polycom. However.
However, the feedback has been consistent.
They love our products, especially some of our newest releases.
But we have been hard to work with because we didn't properly integrate our sales teams and systems and our supply chain challenges have led to extend the lead times on some products.
I would add to that feedback that we've become a bit complacent about our competition and scattered in our messaging.
However, as the incoming CEO. This is an exciting place to be because the underlying technology know how and products are in good shape all of the other problems can be solved with focus and execution.
Let me emphasize the word focus since that will be a change for us as well.
We have a set of executives in place with good bench strength.
Hi security needs of the world's biggest banks and insurance companies governments oil and gas companies healthcare and education systems.
Our quality lens platform will be able to pull all of this AI capability.
Management metrics and consumer enhancement alerts into a single package that is suitable for the world's biggest companies and the individual worker in their homes.
Let me be specific with some of the customer deployments of which I am most proud.
My mother has been a nurse for as long as I can remember over dinner I'd hear about the the challenges and stress, but then also the rewards of patient care.
Now providing patient care remotely requires crystal clear video.
Strong audio integrity, and reliable monitoring and management of those connections.
I am proud that policy is the technology partner of choice for many first responders hospitals and health care clinics.
For example, Polyprotic sure, helping customers like John Hopkins Hospital, which Leverages a fleet of policy video endpoints to conduct 1400 remote video telehealth appointments per day.
Or Maryetta Memorial Hospital, which uses our video and audio solutions to more efficiently connect patients and remote or underserved areas with medical specialists located in any one of <unk> is 50 locations around the region.
Policy is helping in education too like many of you My two school age children are distance learning.
The first time, my daughter had a video conference call with her classmates she was so thrilled.
Needless to say that was many months ago at this point in the novelty has definitely worn off.
For the first few weeks, we all scrambled with whatever devices, we had on hand however.
However, as it's become obvious that these remote learning challenges will last for a while we are seeing increasing demand from school districts looking for higher quality and more reliable solutions.
And just the last quarter, we closed deals with several dozen school districts across the country to deploy our video solutions to support both their faculty and students.
Boston Public schools for instance has standardized on Paulie video equipment.
<unk> several thousand studio video bars across 350 schools to help teachers improve the learning experience for their 54000 students.
Our advanced video features such as speaker tracking and auto zoom, coupled with high quality audio create a more realistic experience and allows students and teachers to fill as if they are in the same room.
Policy is on the leading edge of one of the most transformative events to affect the delivery of healthcare and education and generations and I'm excited to be part of it.
The product portfolios in good shape and the hybrid work environment creates an opportunity to expand our product offering.
In the next couple of months, you will see us launch a range of products more targeted at work from home or work from anywhere.
We announced the first of these earlier this month poly sink as a new family of intelligence Speakerphones designed to address the needs of employees in the office or working remote.
These USB and Bluetooth speakerphones can be used individually at home or Daisy chain together for a complete conference room solution.
They include proprietary microphone technology to track the speaker can integrate with a voice assistant and offer excellent audio quality.
As more employees are now expected to work a hybrid schedule splitting their time between home and office, we have already seen strong reviews and demand for Polly sink.
I have told the team that I joined policy to play to win and I intend to do just that these new product launches targeted for the work from home work from anywhere worked from office environment will provide a strong extensions to our current portfolio stay tuned on that front.
Let me make a few comments on our other short term operating priorities number one increasing manufacturing capacity to match the strong sales demand number to strengthening our strategic partnerships and number three optimizing our costs.
First our immediate focus is to build supply chain capacity to handle the increased demand.
And fiscal queue to we expanded the number of dual source the assemblies negotiated additional capacity at our contract manufacturers and added to our in house manufacturing capacity in Mexico.
These steps allowed us to shift a record number of enterprise headsets and video endpoints. Although we've made progress we are still experiencing extended lead times onto life headsets and video bars.
On the partner front, we continue to offer the largest selection of zoom in Microsoft team certified products for working professionals and our sales teams are working closely with these critical partners.
Wringing Central announces room solution, featuring the policy studio X 30, Nx 15 Star leave a global provider of video conferencing services announced that they have chosen poly as their video platform vendor.
And Polly an extra and have partner to deliver room automation and Avi controls for Microsoft teams.
And each of the companies I have led we have taken focus action to ensure that costs online with strong profitability benchmarks.
While my first priority poly as growth we.
We are still taken immediate action to keep Cogs and operating expenses and check.
We have targeted a couple of various for cost reduction and implemented more stringent cost controls across the board.
I will share more details and future quarterly calls.
Wrapping up I view today's results as the first step in a multi quarter effort to turnaround Polly.
We have more work to do but many of the foundational pieces are in place.
My goal is to focus the organizations immediately on rapid execution on the points above will also positioning us for a strategically differentiated position post covid.
We will fix what's broken and drive this company back to long term growth.
Uncompetitive I play to win I've only been here eight weeks and as I've said before we have a lot of work to do however, after seeing the strength of the product portfolio and the talent and engineering sales and throughout the whole organization.
Confident that we can turn the corner and go on the offensive.
I will now turn the call over to Chuck to review the financials.
Thanks, Dave before I begin I want to welcome day to the team and highlight the strong results in a resumption of Delevering.
To Echo Dave's comments, it's exciting to see the strong demand for headsets and video and how our products are becoming an important component and the delivery of health care and education.
Turning to revenue on page 18.
Non-GAAP revenue declined year over year by 12%, but was above the top end of our guidance range.
But the decline was primarily driven by lower voice demand and continued declines and consumer and services. This was partially offset by growth and enterprise headsets and video as work from home telemedicine and remote learning are driving strong demand.
While lead times continue to improve aggregate backlog was essentially unchanged from last quarter.
<unk> graphically EMEA was flat year over year, while the America's in Asia Pacific declined However, all regions showed sequential growth.
As you can see on page 19 are Nexgen video solutions continue to experience rapid growth nearly doubling sequentially and now representing over 40% of total video revenue.
As Dave mentioned earlier, we shift a record number of video and points in the quarter and a transition to the new platform has been dramatic a.
A year ago or Nexgen portfolio represented approximately 20% of the units shipped this quarter. They were nearly 80%. In addition, this was the best video quarter since the acquisition of Polycom.
Regarding our supply chain, we still have extended lead times uncertain headsets and new video products.
New bookings continue to outpace production. So we expect extended lead times to continue.
Moving on to page 20.
Gross margins were 350 basis points, lower driven primarily by expedited freight costs factory expansion and product mix.
Given the current level of demand, we expect freight costs to remain elevated for the foreseeable future as we make the tradeoff in favor of customer satisfaction over gross margins.
As a result, we expect only modest gross margin improvement over the next couple of quarters.
Operating expenses were flat sequentially in $144 million, which was down $21 million from last year, driven primarily by cost savings from restructuring and lower TNA.
Operating income of $59 million was down 27% year over year due to lower revenue EBITDA of 69 million and non-GAAP EPS of 93, we're both above the guidance ranges.
As discussed last quarter, given the revenue growth, we saw an increase in working capital, which impacted operating cash flows other.
Other drivers included cash taxes restructuring and a legal settlement, we discussed last last quarter, which was book to the piano in Q1, but paid in queue too.
On a year to date basis operating cash flow remains significantly ahead of last year for Q3, we expect to working capital to increase because of the projected revenue growth.
This demand should reverse in queue for when working capital should become a source of cash.
As Dave mentioned, the continued strong demand for headsets and video gave us enough confidence to resume repurchasing that we.
We retired 37 $4 million in the quarter, and our ending cash balance was $228 million well above the amount necessary to run the business.
As a result, we will likely continue to opportunistically retire debt.
Turning to guidance on page 24.
Today, we are providing guidance ranges for our fiscal Q3 similar to last quarter. Our guidance is based on the current supply forecast for enterprise headsets and video endpoints from both our factory in Mexico, and our contract manufacturers.
The availability of that supply can change depending on many factors outside of our control, including the current pandemic.
With that understanding for fiscal Q3, we expect GAAP net revenue of 417 to 447 million <unk>.
Non-GAAP net revenue of 420 to 450 million.
Just that EBITDA is expected to be in the range of $70 million to $80 million.
And non-GAAP EPS is expected to be in the range of 85 cents to one dollar five per share.
Non-GAAP tax rate is expected to be 11% to 13% and shares outstanding should be approximately $42 million.
Finally, I'd like to mention that these guidance ranges assume our factory and supply chain remain in production for the balance of fiscal Q3.
I will now turn the call back to the operator to begin the Q&A operator.
Ladies and gentlemen, if you would like to ask a question at this time. Please press star and then the number one on your telephone keypad. Once again that is star and the number one.
Our first question comes from the line of a net Diana with <unk>.
Hey, guys. This is Michael Fisher on for Omics. Thanks for taking my question and congrats on a great quarter.
Just wanted to I'm wondering if you can kind of give us an idea of the magnitude of both that's great headwind and then also the capacity expansion you I think it's something that will carry on very we have a couple more quarters employers supply chain normalizes. So just give us an idea of maybe the quarter Hey run right. If that's very expect it to the next.
Several corners.
Certainly Ah Michael Thank you this is Chuck.
Free as we said in the last call the freight costs globally have gone up by three to five ask what they were pre pandemic and so what we've seen in terms of incremental freight costs over last quarter was up about 5 million over last quarter and last quarter ended I think more than doubled from the prior quarter. So.
I want to get into the details per se, but it's a pretty significant headwind. We don't expect any near term changes this quarter or next quarter, but we do expect over time as a supply chain stabilises for free to get back to where it was and ultimately should help margins.
In terms of capacity expansion in the last two quarters, we've hired over 2000 additional people in our factory in Mexico, and we've expanded lines and.
Contract manufacturers and what we've seen as a record quarter ever.
Plantronics for enterprise headsets, and a record quarter leasing for the acquisition video and points. So I won't get into the exact levels of details on capacity size and whatnot, that's very strategic information, but we have radically expanded capacity, but we're still not quite <unk>.
Meeting the exact demand.
Okay, and then just talk to video strength, obviously mentioned the education with it wasn't going to some curious cause I guess.
Some people would think of as maybe as more on.
On frame in the office solution. So are you seeing enterprises, a quick huddle rooms.
Sure, we'll return to work or is this.
Getting some home office setups as well.
This is Dave I think there's a couple of factors here on the education side. It's obviously a fairly specific use of the product and it's really sort of out what are the call almost a hybrid.
Consumers Slash enterprise usage, given that has been used by teachers some of which is at home some of which is in the classroom broadcasting to the homes.
A lot of the other video demand is being driven by.
What I would call us some preparation of people coming back to the huddle rooms on a video basis as opposed to just a.
Voice basis, and so it's sort of a mixture across the board there.
Okay propulsion.
Thanks, Mike.
Further next question.
Your next question comes from the line as a Bang Bang Tonight Jodie.
Good afternoon.
I think last quarter U you talked about your outlook for.
The cash flow or maybe operating cash flow for the year is that change at all do you still expect well what are your expectations in terms of full year.
In terms of.
Cash generation.
Yeah, Greg Thanks for the question last quarter, we've outlined about 150 million of free cash flow for the year.
We don't have any updates to that I think that's still good planning number.
We did highlight this quarter came and stronger from a cash standpoint than we'd expected, we thought cash would be a little lower this quarter, but it was quite strong cash quarter based on.
<unk>.
The robust sales.
In Q3, we see cash being a little more challenge because the revenue growth will have some cash tied up and working capital, but then in queue for we expect that profile the change in that cash too.
Two I hit the balance sheet, and so we expect queue for to be a quite strong cash quarter.
Okay, and then as you look at Delevering the balance sheet further or is there like any kind of.
Target is there like a commitment to just.
Quarterly cash flow and put that all towards debt repayment like how's your how should we think about the pace of delevering.
Yeah, we're not being as specific as that I mean, clearly we want to our capital allocation priority is delevering, we're spending some money in capex to expand lines and increased production.
But we are really trying to allocate all of our excess cash to delevering, but we have not outline sort of a formula saying all free cash flow will delever I think this quarter, given where we expect cash to to end will be opportunistically retiring dead and look sort of quarter by quarter, but clearly our focus is.
Paying down the debt as fast as we can given the.
Other other uses of capital for factored expansion in the morning and the business.
Okay and in terms of the.
The supply constraints in the manufacturing constraints booking.
Bookings outpacing her pacing won't be a current production levels do you feel like you've lost.
These just like.
It hasn't delayed sales or do you feel like you've lost business to competitors because of the lack of capacity what's your view on that.
This is Dave jumping in and I think there's probably two categories of demand there is what I would call sort of <unk>.
<unk> consumer demand, where some of our lower video products, such as Eagleye, many and some of our headsets will probably play.
We've seen tremendous demand there we have a backlog there were probably losing some.
Demand to our competition as a result of the supply constraints on the other hand, I know that with regard to specific products were seen in the market that they have constraints as well I think with regard to the higher end enterprise products. There's tremendous demand a lot of those are being sold into our large scale enterprise customers through our distribution channel and so I would say, there's a lot of loyalty to our <unk>.
Base, there because of the quality security compliance all the factors I mentioned during my comments. So I think I think yes on consumer side, probably not much at the end of her side.
Okay and in regards to your comments around.
Cost controls and <unk>.
Keeping an eye on.
On spending.
Target for where you wanted to get the operating margins for the overall business.
Yeah, we're not quite ready to share to be honest I think if you look at our competition and benchmark us we're below where I believe we should be right.
So I guess give me another quarter or two I'd like to be a little bit more specific with regard to the cost changes that were making before we execute there at this point as I said, my first parties growth and making sure that we're all hands on deck too.
Capture the revenue demand here and there not to try to.
Confused the company with priorities.
Alright, thank you.
Thanks, Greg.
Your next question comes from the line of Ma'am I shall with Morgan Stanley.
Oh the team this is Eric on per meter. Thanks for taking my question.
And congrats on the corner, maybe just a quick one for US you mentioned kind of a number of new products and capacity investments, but as we're thinking about just the distribution and sales side or are there other kind of channels that you would need to invest in from a go to market perspective to kind of be.
The capture more of the direct to consumer demand or does not all built out and is that part of I guess investments in and growth as well.
So I think we've spent the last couple of quarters rebuilding the current channel and some of that channel as you know has distribution through Amazon. Another E. Commerce channels. So I think just making that smoother and getting the inventory where it needs to be to meet that demand has been priority number one but absolutely I think there's a place for us to do some.
Further investment.
With regard to E commerce, a bit more directly into some of those channels is not really targeting consumer it's much more I think the bind pattern for enterprises has changed and as we all figure out how to go back to work on sort of a hybrid basis, there will be sort of a bring your own device model and so we want to make sure that we addressed that demand directly as well, but we're doing it with sort of the endorsement of our and.
Prior CIO partners. So yes. There is there is there is an investment required but it is something that's new time very very directly to demand as you might imagine.
Got it that makes sense and then maybe kind of on that changing buying pattern is there a shift and just how tied maybe a headset and a video sale is whether.
Those purchases historically more separate and you're kind of seeing.
More demand for a full solution I think last quarter, you kind of mentioned that that just wondering is if it applies hall some more to in the office as well as maybe some of the bundling I think you mentioned the last quarter.
Yeah, I think so early days for all of US trying to figure this out red, but we're certainly seeing demand for.
Then some of the new video products that we put out there in the studio X products.
Which gives me a very sophisticated kodak for sort of a huddle room situation, but you can also use them at home tied to a TB. You can also then tie that too.
Some of the other audio products that we have whether it's a headset or the sink devices and so I think that's sort of integrated use of our products is going to become even more popular.
And so we're monitoring that very closely and making sure that we build that out to.
To make it easier to purchase.
Thank you.
And ladies and gentlemen, just as a reminder, if you'd like to ask a question. Please press stock and then the number one on your telephone keypad your.
Our next question comes from an online Everglades paint with Cowan.
Hi, guys. Thanks for taking my question.
Maybe just a follow up a little bit on the backlog maybe.
Let's talk about how long you expect.
Fly constraints to last is it another quarter or.
Is it just impossible to tell at this point.
Yes, I would say Liz.
Liz in general it's hard to tell.
We have decreased the lead times, so we feel better that now we're getting products to our customers faster.
And I think there's a dynamic happening where the aggregate backlog is actually up just a little bit from where it was the end of last quarter, but the weeks have gone down because revenue has grown in the supply chain has grown we'd always like to have some backlog. So backlog is a good thing we want to have backlog today, we have we have too much for certain category.
<unk> and I would expect that hopefully by Q1, we'd be at normal lead times for all products, but we we don't know exactly because it's partially.
It is demand driven so I'd say.
Probably will not be out of the woods by the end of March, but I would expect to be out of the woods in some time in the June quarter for sure.
Okay are there certain components that are particularly title I think more labor intensive issues.
It's both so there are constraints on.
On Pcbs, an Ics chips and whatnot. There are also physical constraints on molds.
For the components that we make in our contract manufacturers make so we've done quite a bit of capital investment in increasing the ability to.
To make more.
But we also don't want to overshoot and Overinvest and then have another issue. So we are being very thoughtful and how we expand because the lead times are quite long in some cases, so I would say the answer is bowl.
Okay great.
Thanks.
Thank you both.
And you can have a follow up question from the line of godparents Mister Kenny.
Hi, I just wanted to take into the some of the.
Integration issues you mentioned.
When you were putting together polycom and.
Centronics, particularly on the enterprise headset side I know you've been student implemented a lot of changes brought in some new leadership and tried to rectify some of the issues can be discerned, whether those are having a positive impact yet it's kind of hard to tell given obviously the work from all demand has been so strong so maybe.
We're not seeing explicitly some of the the benefits of those changes, but is there any way to discern whether.
Seeing green shoots are positive the positive impact in those changes yet.
So Greg this is Dave. She also day 50 for me. So let me give you sort of a very <unk>.
High level view based on my conversation, so far and then check and provide a little bit more of a historical view the issue that I've heard from our distributors or retailers in the end customers have been.
Two fold I guess right. One one has been with regard to the sales friction.
It's been we've had a very complicated sort of pricing contracting and rebate model.
And best and that has been an evolution, that's taking quarters multiple quarters to fix and when I am talking to them. We've done a series around Robbins with all the distributors and resellers around the world and there's still there's still issues of complaint.
I wouldn't expect anything less these guys are aggressively running their own businesses and so we still have things that we need to fix but I'm also here an acknowledgement that we've made a lot of progress versus what it was a couple of quarters ago. So I.
Highlights or to Carl we see and sort of the sales team in terms of the plans that they put in place there.
Chuck I would just add Bob and I mentioned last quarter I think some of the system's issues a lot of those have been sorted out and we've done a lot of work on having systems that enable that agility that and nimbleness that Dave was talking about.
And then we have a hired additional our specialists and I think the teams in a really good job working with our.
Distribution partners resellers to get them the tools they need and then having the right account coverage and specialty in the field and so the team is performing.
Really really well a lot of the team is new but they are performing quite well.
Okay, great. Thank you.
Thanks, Greg.
And there are no further questions at this time.
Thank you all very much of the time, we look forward to getting to know many of you in person here shortly or at least virtually so to speak and look forward to keeping you update on the turnaround. Thank you all.
Ladies and gentlemen, this does conclude today's conference call me. Thank you for your participation you may now disconnect.
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Right.
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