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Edited Transcript of PLT earnings conference call or presentation 27-May-20 9:00pm GMT

Q4 2020 Plantronics Inc Earnings Call

SANTA CRUZ Jun 30, 2020 (Thomson StreetEvents) -- Edited Transcript of Plantronics Inc earnings conference call or presentation Wednesday, May 27, 2020 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Charles D. Boynton

Plantronics, Inc. - Executive VP, CFO & Principal Financial Officer

* Michael R. Iburg

Plantronics, Inc. - VP of IR

* Robert C. Hagerty

Plantronics, Inc. - Chairman of the Board & Interim CEO

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Conference Call Participants

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* David Luke Eller

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* Gregory John Burns

Sidoti & Company, LLC - Senior Equity Research Analyst

* Meta A. Marshall

Morgan Stanley, Research Division - VP

* Michael Fisher

Evercore ISI Institutional Equities, Research Division - Research Analyst

* Michael James Latimore

Northland Capital Markets, Research Division - MD & Senior Research Analyst

* Paul Jonas Silverstein

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Poly Fourth Quarter Financial Results Conference Call. (Operator Instructions)

I'd now like to hand the conference over to your speaker today, Mike Iburg, Head of Investor Relations. Thank you. Please go ahead, sir.

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Michael R. Iburg, Plantronics, Inc. - VP of IR [2]

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Thank you, operator. Welcome to Poly's Preliminary Financial Results Conference Call for the Fourth Quarter of Fiscal Year 2020. My name is Mike Iburg, Head of Investor Relations, and joining me today are Bob Hagerty, Chairman of the Board and interim CEO; and Charles Boynton, Executive Vice President and CFO.

The preliminary unaudited 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 1995. 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 today's remarks, we will refer to specific slides from our Q4 earnings presentation. This presentation is available on the front page of our Investor Relations website at investor.poly.com. Unless otherwise noted, all comparisons discussed today will be to the same quarter in the prior year.

You should also refer to the materials we provided today for an explanation of the non-GAAP financial measures discussed on this call, along with the reconciliation of those measures to the nearest applicable GAAP measures. These non-GAAP measures are indicators 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. These materials are posted on our Investor Relations website at investor.poly.com.

With that, I will now turn the call over to Bob.

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Robert C. Hagerty, Plantronics, Inc. - Chairman of the Board & Interim CEO [3]

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Thanks, Mike, and thanks, everyone, for joining us today. Before I discuss our performance for the quarter, I'd like to make a few opening remarks. Our strategy is to be the endpoint provider of choice as customers move their communication platforms to the cloud. For the past several months, the pandemic has forced businesses around the world to shift many of their employees to remote work. As businesses dealt with these work-from-home mandates, there was a rush to provide employees with the tools needed to stay engaged and productive. For many companies, that meant duplicating the home many of the collaboration tools employees have grown accustomed to in the office.

Another dynamic is the widespread adoption of video collaboration, which has moved beyond the corporate conference room into the mainstream. Through platforms like Microsoft Teams, Zoom and others, video collaboration has become a key tool to keep remote employees engaged and connected.

In our view, the concept of office work is fundamentally shifting. Even after the work-from-home mandates are lifted, the number of remote workers will likely remain significantly higher than the past, and businesses will need to ensure these workers have a consistent set of manageable professional collaboration endpoints. The net result will be an expanding TAM and long-term growth opportunity for Poly and our industry.

Turning to our preliminary financial results on Page 5. Q4 was a strong finish to a challenging year. Our team overcame a series of supply chain disruptions and took aggressive steps to manage expenses, allowing us to deliver revenue and earnings above the high end of our guidance range. We exited the March quarter with 6 weeks of backlog and a very strong cash position. Chuck will discuss the results in greater detail in just a moment.

Now let me take a few minutes and provide a brief update on how COVID-19 has impacted the company. Turning to Page 6. We saw historically high demand for enterprise headsets, which began in early March and continues today. On the other hand, as businesses around the world vacated their offices, we saw what we believe to be a somewhat temporary shift from audio and video solutions that require on-site personnel.

From an operational perspective, our in-house manufacturing facility in Mexico has resumed production after the factory was reconfigured to implement COVID-19 safety protocols. To provide a bit more color, the increase in headset demand was so strong in March and April that it depleted both the on-hand inventory and the channel inventory of some of our most popular headsets.

Our operations team is working aggressively with our key suppliers and contract manufacturers to fulfill the backlog as quickly as possible. For example, we have expanded our dual sourcing of high-volume headsets, purchased additional tooling and secured additional capacity at our contract manufacturers. These steps will allow us to increase the global production of specific headsets to help meet the current demand. However, even with these actions, we expect to exit the June quarter with an elevated backlog.

I'd also like to mention that while certain headsets are in short supply, our teams are taking steps to prioritize orders received from first responders, governments and health care organizations to ensure they have the necessary tools to be safe and productive. For example, our headsets are connecting over 350,000 dispatchers in 911 emergency call centers.

Our video solutions are connecting world leaders around the globe, and our voice and video endpoints are supporting both telemedicine and remote education at many of the leading hospitals and universities around the world. We have a long history of creating collaboration tools for remote work. It has been part of our DNA for the past 60 years, and our employees have always been strong internal users of our technology. As a result, our employees were able to easily transition to work from home.

Moving on, I'd like to take a few minutes to discuss the overall business. In the past several months, we've taken actions to resolve the go-to-market issues we experienced late last year. While we still have a lot of work to do, we're beginning to see some early signs of improvement. Our sales organization is gaining traction in specific markets, even as we adjust to the new sales motion due to the pandemic.

We've improved our communication with partners and customers, which has led to additional opportunities. With increased demand for our headsets, we are capturing customers across a broad market working -- and we're working very hard to keep them. We've made progress with -- but have more work to do, and we'll continue to focus in these areas.

Our strategic alliance partners are working closely with us to offer a combined portfolio that meets customers' needs. We are starting to see new opportunities emerge that are direct results of our alliance strategy; in particular, with Microsoft and Zoom, where we have the broadest portfolio of certified and supported devices. At the same time, we are strengthening our relationship with IT service providers like RingCentral, 8x8, LogMeIn, Google Voice and Vonage.

Another key focus for the company has been our channel partners, where we continue to improve our systems and processes. Our new partner program brings everyone together under one global program with the goal of simplifying the interactions at all levels. We are making it easier for our partners to sell our portfolio. The new program rewards partners for the marketing and selling of our solutions as well as for training and enablement. Finally, last month, we launched our new corporate website, which includes new partner portal to provide them with quick and easy access to product details, technical information and local resources.

On the product front, our design teams remain busy, bringing new products to the market. While many of those solutions are designed for the office, we have a broad range of endpoints that support remote work as well. Our work-from-anywhere portfolio includes the broadest range of enterprise headsets, both wired and wireless personal speakerphones, high-quality cameras and industry-leading video bars.

As market conditions and customer demands evolve, our product teams are continuing to innovate solutions to market with relevant features and technology. We have an aggressive road map for fiscal '21 with new products scheduled to be launched in each quarter in each of our product categories.

In conclusion, we have a strong cash position and an industry-leading product portfolio addressing a large and growing market. Our large customer base and strong strategic alliances are further evidence of our leadership role in this market. We continue to see elevated demand for our enterprise headsets and expect the global return to the office to improve demand for our phone and video solutions. In the past few months, we've seen a profound change in the way business is conducted around the world.

As we continue our CEO search, I'm proud of the Poly team as we work together to provide our customers with collaboration endpoints they need today and to capitalize on the market opportunities that work-from-anywhere presents tomorrow.

I'll now turn the call over to Chuck to discuss our financial results.

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Charles D. Boynton, Plantronics, Inc. - Executive VP, CFO & Principal Financial Officer [4]

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Thanks, Bob. I'd like to begin by reminding everyone of the business update we provided on April 15. In that communication, we discussed the steps we are taking to maximize financial flexibility and liquidity including deferring a voluntary Q4 debt prepayment, suspending the dividend and aggressively managing our costs. These steps, along with our quarter ending cash position of $226 million, give us confidence while navigating the current economic environment.

Turning to our preliminary unaudited March quarter results. As Bob mentioned, it was a strong finish to our fiscal '20 year. Demand for headsets drove our revenue above the guidance range, reduced on-hand inventory, reduced channel inventory, improved our cash flow from operations and allowed us to enter April with 6 weeks of backlog. As headset order flow continues to be strong, we will likely exit fiscal Q1 with an elevated backlog but should be back to standard delivery times for most products in fiscal Q2. Our focus on cost discipline this past year became a real benefit as we worked our way through the macro challenges of fiscal Q4.

Page 19 provides revenue by category and geography. As you can see, headsets and voice sales remained strong in Q4, while our video business was in line with our expectations. Our new video bars were supply-constrained as we were ramping production through the quarter and our large legacy video systems slowed as offices closed due to the pandemic.

Geographically, both EMEA and Americas saw a dramatic increase in headset demand related to shelter-in-place mandates. However, our Asia Pac revenues were negatively impacted by COVID-19 as shelter-in-place policies were implemented earlier. As expected, we closed the sale of our gaming assets in March, and we continue to streamline the balance of our consumer portfolio.

I'd also like to mention that historically, we reported the mono premium product line in our consumer category. With today's earnings presentation, we have moved that product line into the Enterprise Headset category, which we feel is a better fit. This is reflected on the current page, and we also have provided a restated 8-quarter trend on Page 30.

Turning to Page 20. Gross margins were impacted by factory underutilization and tariffs, and we also saw an increase in freight costs related to supply chain disruption during the quarter. Factory underutilization will continue to be a factor holding down gross margins next quarter as our overall volumes are just now getting back to prior levels. We have been aggressively managing operating expenses as the COVID-19 economic impact unfolds. Our March quarter saw a significant reduction in variable compensation, hiring and travel. For the full year fiscal '20, we reduced non-GAAP operating expenses over 11% on a combined comparative basis.

We continue working to keep our cost structure aligned to revenue expectations. To that end, in our June quarter, we expect to book a restructuring charge of $25 million to $35 million that will cover office closures and headcount reductions. However, even with the latest cost reductions, we expect OpEx over fiscal '21 to be roughly consistent with the expense levels in our fiscal Q4 reported today.

EBITDA was $60 million in the quarter, and we had earnings per share of $0.30, both above our forecast. Regarding our non-GAAP tax rate, we redomiciled our intellectual property during the quarter, which affected the tax rate, pushing it up to 53% for the quarter and 19% for the full year fiscal '20.

As we discussed in our business update, the company's preliminary financial results include a noncash impairment charge, currently estimated to be $180 million related to the company's intangible assets and property, plant and equipment in the voice business as well as a noncash impairment charge currently estimated to be $468 million to goodwill related to an overall decline in the company's earnings and a sustained decrease in its share price.

Due to the complexity of the analysis resulting from the economic uncertainty of COVID-19, the company is still in the process of finalizing the impairment assessment, including the design and operation of internal controls, so actual results may differ materially from the preliminary unaudited results provided today. The company expects to complete the impairment analysis and finalize the amount of the impairment charges in connection with its filing of the company's Form 10-K, which is currently expected to be filed on or around June 3.

Turning to Page 23. A significant reduction in working capital, primarily inventory, contributed to strong operating cash flow in the quarter of $62 million. This is the highest cash flow for the company since the Polycom acquisition. In addition, the deferral of debt prepayment helped to push our quarter end cash balance to the highest level in over a year. We have not yet decided on a prepayment in the June quarter, but on balance, we prefer to maintain significant liquidity given the current market environment.

Trailing 12 months EBITDA was $293 million as of fiscal year-end, and our net debt position was $1.4 billion. We currently have significant headroom in the covenants related to our undrawn revolver. As we have stated in the past, we don't expect to have any covenant issues in fiscal '21. However, if for some reason, we have covenant constraints, we can terminate the revolver and the financial covenants go away.

Turning to guidance on Page 25. Before I walk through the numbers, I'd like to offer some context for our fiscal Q1 guidance. We entered April with very low headset inventory. We then experienced additional disruptions across our supply chain due to the pandemic. Today, our factory and suppliers are generally running at normal capacity. However, we remain supply-constrained on specific products. In addition, our other product categories are impacted by our customers not having staff in the office to receive shipments.

With that context, our Q1 guidance is as follows. We expect GAAP net revenues of $330 million to $365 million and our non-GAAP net revenues of $335 million to $370 million. Total adjusted EBITDA is expected to be in the range of $25 million to $45 million. And non-GAAP EPS is expected to be in the range of a loss of $0.18 per share to a gain of $0.22 per share.

Finally, I'd like to mention that these guidance ranges include our estimates of the impact of factory overhead underutilization due to lower production volumes, incremental freight due to supply chain challenges and the cost of factory reconfiguration.

With that, I'll turn the call over to the operator to begin the Q&A. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Meta Marshall from Morgan Stanley.

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Meta A. Marshall, Morgan Stanley, Research Division - VP [2]

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Great. I wanted to see if you could talk a little bit more about some of the improvements on the Enterprise headset channel and just some of the work to reconnect with some of kind of the previous Plantronics channel?

And then maybe secondly, on inventory, is that something where you feel as if you've worked through a lot of the Skype for Business or kind of older product inventory? Or just should we think of that as a source of cash over the next couple of quarters as well?

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Robert C. Hagerty, Plantronics, Inc. - Chairman of the Board & Interim CEO [3]

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So this is Bob. And let me cover at least at the high level, some of the things that we addressed. So coming into the quarter or coming into the company, I did -- in early February, we did find that we had to do some things around coverage and specifically in the headset business. So we've been working hard to bring on some specific, I would call them, overlay salespeople to focus just on the headset business.

We did have issues with visibility around our point-of-sale information, and that has been cleaned up. And we have shifted generally from being able to do a mix of how sales gets paid to primarily focusing sales on, sales out.

I don't know if you have specific questions about channels. But let me shift it over to Chuck to give you some more color and then go over some of the more specific questions you had.

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Charles D. Boynton, Plantronics, Inc. - Executive VP, CFO & Principal Financial Officer [4]

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Yes. I mean -- so specifically, we had a really, really strong quarter on headsets, and generally sold out of the high runners both the channel and our on-hand inventory. Our legacy or contact center headsets increased from $50 million in Q3 to $66 million in Q4. And the UC headset business went from $76 million to $90 million. And that's our revenue. And so the channel had already -- we'd already taken channel inventory down. And so we found ourselves with effectively 6 weeks of backlog, which the company never really had before.

As we sit here today, we are definitely focused on keeping inventory levels down, but we need to increase the supply of our headset business. So our factories in Mexico are running at mostly full speed today. We did -- we were down for a couple of weeks. And we're focused on selling all the products that we have on hand. But certainly, the short-term demand increase has been around headsets.

Secondarily around the new video collaboration tools, the Studio X Series, X30 and X50, which just started shipping last quarter, but the rest of the products in desk phones and whatnot have been a little bit more challenging because people are not in the office to receive those products.

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Meta A. Marshall, Morgan Stanley, Research Division - VP [5]

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Got it. I mean I guess I'm just trying to get a sense of -- obviously, I would expect kind of headsets to be sold out right now, just given kind of current situation. But just like going forward, do you feel like all of those investments needed in overlay salespeople or kind of reconnecting with old channel partners has been done? Or is that work to be done? Just getting a sense on kind of some of the previous issues versus clearly an environment that's very, very conducive right now.

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Robert C. Hagerty, Plantronics, Inc. - Chairman of the Board & Interim CEO [6]

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Well, I think it gives us some great cover because we're able to see all the customers that we have had and then go find some new customers and new channels because the demand is quite high. So I think that it's been actually quite a good opportunity for us to touch base with all those channels.

There's always shifting changes -- shifting demand and changes in the marketplaces, depending on what region you're in and how things are ebbing and flowing. But I can say that the work is never done. And -- but I'd say we're substantially through the difficult part of making those transitions. And we're fundamentally on the right road, and we'll only see improvement from here.

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Operator [7]

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Your next question comes from the line of Greg Burns from Sidoti & Company.

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Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [8]

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Yes. Just to follow up on the channel inventory. So can you quantify how -- like you took a $60 million charge for reduction in channel inventory a quarter or 2 ago. Now that channel inventory has been depleted, can you quantify what that is? And do we see that need to be replenished in Q2, Q3?

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Charles D. Boynton, Plantronics, Inc. - Executive VP, CFO & Principal Financial Officer [9]

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So we don't sort of disclose the channel inventories generally. But the channel inventories were down fairly significantly in Q4 in -- they're too low, quite frankly, and sold out in headsets. So we definitely want to replenish that inventory. That will take a while.

As we said in the prepared remarks, even through Q2, some of the high runners may not be fully caught up. There are other areas, though. Again, it's geographic, it's by channel and by customer. They're all a little bit different. But I'd say the aggregate number is probably on the lower side of where it should be. So it may come up a little bit, but it's -- we went through a lot of pain and hard work last year to get channel inventories to the right level. Because we believe fundamentally that by reducing channel inventory, by reducing our on-hand inventory, that's a better financial equation for all of us in the -- across the supply chain. It reduces invested capital and will make everyone better off. And so we're not going to -- we are focused on keeping channel inventories at the appropriate level based on the product and the geography.

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Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [10]

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Okay. Relative to your revenue guidance, can you maybe give us a little color by segment on how you're thinking -- how you get to those ranges?

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Charles D. Boynton, Plantronics, Inc. - Executive VP, CFO & Principal Financial Officer [11]

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Yes. Certainly. So it's a fairly simple equation. Here we are with, call it, 5 or 6 weeks. I think, 5 weeks to go in the quarter. And our main factory in Mexico was offline for 2 weeks to reconfigure for health and safety, and so to make it a safer place for all of our people to work, and we're proud of the work that, that team did. They did a phenomenal job.

We also had supply disruptions in our -- with our -- some of our CMs and ODMs. And so the guidance effectively takes into account the supply constraints that we have and how much we can build ourselves and how much we can receive from our channel partners, our CMs. The real constraint right now is on the high runners. Think of those as our professional webcams, the EagleEye, the EagleEye Mini, a vast majority of our headset lines. These are in very high demand. And so those we can sell as many as we can make.

Desk phones and video, we have plenty of inventory, and we're actively selling those. And so it's really a fairly simple equation of what orders do we have placed, what trends do we expect from a sales standpoint and what are the supply constraints? So the guidance, really, the real impact is the supply constraints that we're seeing for our high runner products.

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Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [12]

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Okay. But can you maybe give us a little bit of color on what growth you're embedded -- growth assumptions you're embedding for enterprise headsets, voice and video?

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Charles D. Boynton, Plantronics, Inc. - Executive VP, CFO & Principal Financial Officer [13]

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We're not breaking that out for Q1 because, obviously, we're supply constrained. And so we're selling whatever we can make. And so the real -- I think for the year, it's a little more uncertain what's going to happen with as people return back to the office place. I think there's -- it's more uncertain for the year for both -- certainly for Q1, it's really a supply constraint equation. And then for the balance of the year, it's really geographic and what the return to the workplace looks like, and that is somewhat uncertain for us right now.

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Operator [14]

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Your next question comes from the line of David Eller from Wells Fargo.

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David Luke Eller, Wells Fargo Securities, LLC, Research Division - Associate Analyst [15]

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I also have a couple of questions on the headsets. I'm curious to hear a little bit more about what's going on in the headset market. If you could talk about the corded legacy business, maybe what you're seeing from contact centers and like if there's been a big boost in demand there that you've kind of already met like a surge need or whether that should continue throughout the year?

And then also on the UC business, could you talk about just the compatibility of your product set for a work-from-home employee who may just be using an iPhone or an Android instead of an open SIP phone or a VoIP service.

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Charles D. Boynton, Plantronics, Inc. - Executive VP, CFO & Principal Financial Officer [16]

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Yes, certainly. So I'll start, and Bob can add some color as well. On the contact center, we have seen a pretty strong increase in demand. It's hard to -- see, the long-term trends, I think, are things like contact centers will no longer be sharing headsets. They'll have their own headsets. They won't be repurposing them for new employees. So I think it bodes well long-term for the contact center business. But -- and I think that the increase in demand is also, people are working from home that are in contact centers doing the remote work.

The bigger increase has been on the UC side as people work from home and they're using a Zoom call or a Teams' call with their computer, and it picks up all the background ambient noise of the household, whereas if they have one of our great UC products, that will -- has things like active noise cancellation, sound fencing, provides a professional environment as you work from home or in the coffee shop. And those are interoperable with the Bluetooth standard. We have [depth]. There's a whole series of technologies. And this is why, historically, we've had such great success in the headset business as it just provides a way better user experience, and there aren't any really constraints in terms of the platform you're using and certainly the proliferation of Teams and Zoom and those, I think, are increasing the demand profile for the UC headsets. And as people return to the office, we think that will actually continue and possibly increase even more as people see the benefits of those better -- of that better experience.

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Robert C. Hagerty, Plantronics, Inc. - Chairman of the Board & Interim CEO [17]

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And just to put a context on -- just a little more context on it. One of the things I think that we need to understand is that the work from home is here for quite a while. And I think it migrates to a hybrid where people will work both from home and/or remotely and in the office. And so I think the facilitation of those -- both the in-office and the home are going to continue for a while. And so that is also upward pressure on demand.

And I think that this is -- 2 things are going on. One, it's obviously a safety and health issue today. But what enterprises are finding is that it is also cost savings. And as they have to distance workspaces in their physical plant, this becomes a way to facilitize that. And that puts more demand on not only headsets, but there will be folks who bring home a voice over IP phone. And there will be offices that are going to need cameras and some of our huddle room products in some cases, using them for people who have to be on conferences quite a bit.

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David Luke Eller, Wells Fargo Securities, LLC, Research Division - Associate Analyst [18]

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Great. And then could you also just remind us of the positioning of your headsets? So like where the majority of your portfolio falls in terms of value priced versus midrange versus high end? And maybe if you could comment on whether business customers are primarily opting for kind of value-priced headsets in the midst of belt tightening or maybe whether a lot of those models are sold out, and they're being forced into higher price points due to stock-outs and backorders.

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Charles D. Boynton, Plantronics, Inc. - Executive VP, CFO & Principal Financial Officer [19]

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Yes. I mean I think we're -- I think us and the competitive landscape are all seeing a strong increase in demand in many markets, they're buying whatever they can get their hands on. Our positioning is -- there's really 2 main players. We're 1 of the top 2 players in this category. We have products that address the entire spectrum of headsets. And so we've got everything from the high end to the more value-priced, and I don't think the headsets are as price-sensitive because these are enterprise products as other categories.

One of the reasons we got out of the gaming business is it's very price sensitive, and our headsets enjoy high margins and they're less price sensitive. It's more about quality and feature and functionality. And we have a suite of products that address up and down the stack. And so I think that what you're seeing is people are buying whatever they can in certain markets because people are sold out. And as the normal cycle replenishes, I think you'll see us and the other market participant at the top end, having, again, most of the share in this market.

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David Luke Eller, Wells Fargo Securities, LLC, Research Division - Associate Analyst [20]

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Okay. And then, Chuck, I hope you could give a little bit more color. You kind of touched on your goal, which is to, I guess, maintain cash balances, I guess, higher. It doesn't sound like you're committing to near-term debt paydown. And then you talked about if covenants become an issue, you can terminate the revolver to deal with any covenant issues. But I mean that's a strategy that obviously comes with some risk. So could you talk us through maybe how you might see the year unfold? Or if, I guess, that's probably more of a backup scenario?

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Charles D. Boynton, Plantronics, Inc. - Executive VP, CFO & Principal Financial Officer [21]

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Yes. Well, I mean, before we talk about, we needed a minimum of $100 million of cash to run the business. And we're sitting here with $225 million or $226 million. So we had not voluntarily prepaid the debt to maintain more flexibility. The revolver is currently undrawn, and we're sitting on the highest cash position we've had in, I think, over a year and had our best operating cash flow quarter in over a year.

And so while our pre-COVID plan was to aggressively delever, we would have been paying down $75 million, $100 million already. And so I think we don't have a new -- we want X amount of cash is our new target, I would still say the minimum we need is $100 million.

And we don't see a covenant issue. So that doesn't really weigh on us. I just want to, again, recommunicate that we don't have a covenant issue, and if we did, we could just terminate the revolver and it goes away, just to assuage any concerns. We expect to continue to drive material free cash flow throughout the year. So we think that we can generate a significant amount of free cash. And then we will pay down debt. We're just not committing right now as to when and how much to give ourselves more flexibility.

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Operator [22]

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Your next question comes from line of Mike Latimore from Northland Capital.

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Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [23]

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Great. Can you talk a little bit about -- I think the headset demand was elevated starting in mid-March, remains elevated. What have you seen in terms of the voice and video demand patterns kind of mid-March to the day? Did it drop a little bit and it's stable? Or has it sort of been stable? Or maybe just talk about the demand for those 2 areas since mid-March.

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Charles D. Boynton, Plantronics, Inc. - Executive VP, CFO & Principal Financial Officer [24]

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Well, certainly, I think I'd first say that we had a strong -- a very strong desk phone quarter for Q4. Our desk phone business went from $48 million in Q3 to $68 million in Q4. So we had a really, really strong Q4. And we have, I think, the leading desk phone that's team certified. The CCX line is a really awesome phone. And I think when people are back in the office, you'll see continued proliferation of the desk phones. Remember, there's still 400 million PBX connected phones out there that will get replaced at some point with either a headset or a SIP phone.

On the video side, we were supply-constrained on the new X series launch, and we knew we would be. That was a little more challenging quarter where it went from $70 million to $62 million of revenue overall. We have seen the on-prem systems in APAC were still fairly strong in Q4. As we sit here today in the demand environment, I think we're a bit more cautious on Q1 and Q2 because if people aren't in the office, they're not buying and receiving the goods, I think that the trends don't really change. And in fact, we're training a whole new generation of people to do video conferencing.

I think this bodes well long-term for the video solution. And people realize that doing a Zoom call over your PC is suboptimal and having a video bar like an X30 or a Studio USB bar is a way better experience. But I think it's just unclear of when that demand will return to normal based on people working remotely.

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Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [25]

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Great. And just can you give the desk phone number again quarter-to-quarter?

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Charles D. Boynton, Plantronics, Inc. - Executive VP, CFO & Principal Financial Officer [26]

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The desk phone number was $48 million in Q3 and $68 million in Q4.

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Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [27]

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Got it. And then you've launched a lot of new products, including Teams, Zoom certifications, that sort of thing. Is there a way to break out what percent of the fourth quarter or the pipeline is kind of coming from these new products?

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Charles D. Boynton, Plantronics, Inc. - Executive VP, CFO & Principal Financial Officer [28]

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We haven't done that yet. We've considered breaking out revenue from new products. But given the sort of pandemic, we shifted our approach because just -- things just changed so quickly that we have not. I will say that earlier in the year, we had outlined that we thought the video business, the Studio line, would be material to our results by Q4 of this year. And we had a quite strong Q4. That we generated 40 -- sorry, $20 million of revenue in the Studio line in Q4, which is a material number to our results.

And so we're proud of that number. It could be higher if we had more supply. It's hard to say what will happen in Q1 and Q2 given the people are working from home.

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Michael James Latimore, Northland Capital Markets, Research Division - MD & Senior Research Analyst [29]

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Okay. And just last one, what tax rate should we be using for fiscal '21?

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Charles D. Boynton, Plantronics, Inc. - Executive VP, CFO & Principal Financial Officer [30]

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I would continue to use the kind of 18%, 19% range.

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Operator [31]

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Your next question comes from the line of Paul Silverstein from Cowen.

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Paul Jonas Silverstein, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [32]

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I apologize to you and everybody else on the call, if this is repetitive. We had our TMT conference today. So I missed part of this call. I do apologize. But I did hear quite a number of the questions, and I want to try to tie together what I think I heard, in particular. If I've got the numbers right, your voice and video endpoints business is about $200 million this quarter. Your headsets, I think, were about $183 million, if I saw the numbers correctly. So they're about roughly the same size, if I take voice and video endpoints together relative to headsets.

And taking a step back and thinking about the current ongoing crisis and looking downstream, how it impacts how we work and play over the next many years, the thought arises that many organizations, consistent with what we've -- announcements we've heard from various organizations, are going to shift workforce to one extent or another to home, and it's obviously not binder. Plenty of us will go back to our offices.

But my question to you is, given that likely shift to home, it helps -- I would think it would help your Enterprise headset business. At the same time, on the one hand, you've got your new video endpoints in the market. And it sounds like you're finally ramping aggressively. But that trend to work from home, I trust is not going to be a favorable trend for you and other companies, for your products that are sold into enterprises for employees that are working on-premise. There will be relatively fewer employees on top of the fact that, unfortunately, due to the terrible economic cost of this crisis, there are fewer organizations that are going to be in the peak of health, just the opposite. Those organizations that survive this, obviously, the demand is less, the number of employees are fewer.

And so as a general proposition, demand for on-premise infrastructure, whether we're talking about campus switching or, in your case, video endpoints and the desk set phones that are typically, I understand that some of us at our homes will use those for a better experience, but I would think for most of us who work at home were not going to be buying from you or anybody else or organizations are not going to be buying from you or anybody else those video endpoints and those desk set phones.

On the other hand, I would think it will be very good to your Enterprise headset business. I'm hoping you can unpack that and tell me where I'm wrong in the thought process. Again, looking at it, I recognize there are a lot of variables. Things are as clear as mud today in terms of the pandemic and how this is unfolding. But if you could share insight for how you think this unfolds for your Enterprise headset -- your Enterprise desk set phone and video endpoint business relative to that trend? Where do I have it wrong?

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Charles D. Boynton, Plantronics, Inc. - Executive VP, CFO & Principal Financial Officer [33]

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Yes. I think, Paul, I mean, I think your general theme is not that far off. I mean so generally, I think you're correct. The headset business is about half of the product revenue. And the other half would be video, desk phones, conference phones, that's not too far off. Of course, services is an important component. We're still seeing good bookings in Asia for our legacy video solutions, and that obviously has a nice maintenance stream attached to it.

The desk phone market and the conference phone market, I think you're right, is going to be down. And if you saw our impairment discussion earlier, that business has been -- took the brunt of the impairment or took all of the impairment. And so I think that you're right on that sort of thesis that still those 400 million to 450 million desk phones out there will get replaced by SIP phones or headsets, and they're not going away. But I think you're right. In the short term, that's going to be more challenging.

On the other hand, we've talked about headsets over and over, I think that bodes well for headsets. And video is really the one I think that I would challenge a little bit because we do have great technology. Our webcams are very, very good technology. And our video bars are -- basically can be definitely a work-from-home solution, especially for, I think of a CFO attending an earnings conference or a financial conference, using a PC camera and microphone and speakers is not a good solution and having an X30, our new Studio X30 video bar would be a way better experience both for the presenter and on the far end, the receiving end. And I think this whole shift of training hundreds of millions of people to use Zoom and Teams and whatnot bodes really well long-term for video anywhere, not just video in the huddle room or the boardroom, but video from home.

And so while I think that market is rapidly evolving and changing, and I think it will -- this will unfold over probably years. But that market, I think, is -- will be quite strong in the future, and there's a real bull case on the video side. And so I think you're right on balance. I think it's net positive for video and headsets and a net negative for desk phones and conference phones.

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Paul Jonas Silverstein, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [34]

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Again, if you already addressed this, I do apologize to you and everybody else. But I would think, in your case, if we look at the months of March, April and now May, you have 3 months of data in terms of how many of us, of employees, who are -- obviously, we're all working from home or virtually all of us are working from home. What did you see in terms of demand for your video endpoints and for your Enterprise desk sets, not headsets, but desk sets. What did you see in terms of demand that would suggest to what extent we're actually porting our normal workplace environment to a home workplace environment. In one little wrinkle, I appreciate that you finally have out, and congratulations, you finally have out a broader suite of video endpoints. And so you can now access in a more meaningful way, and it sounds like you have with that $24 million number, and it's growing, and that's good to see.

But I trust that makes -- to the question I just asked, it makes it a little bit challenging in the sense that you're going to have a nice ramp, hopefully, from here as you ship those new platforms. And so it may mask real end demand for that work from home.

But I apologize. Again, the direct question would be, what did you see in recent months that would suggest to what extent employees are porting or their employers are porting the employee workplace environment to the home on the desk set and the video endpoint side?

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Charles D. Boynton, Plantronics, Inc. - Executive VP, CFO & Principal Financial Officer [35]

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The video, I think it's too early to tell how that all unfolds. And I just -- I think it's too new of a phenomenon to see how the video unfolds in the work from home. Certainly, a dramatic increase in headsets. And our backlog is at a level that -- the highest I've ever seen in the company. I've only been here for a year. But it's incredibly strong on the headset side. I think it's too early to tell on video and desk phones at this point. Bob, I don't know if you have any color you want to share.

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Robert C. Hagerty, Plantronics, Inc. - Chairman of the Board & Interim CEO [36]

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Yes. I think, look, there's some trends that are undeniable. The first thing is this has hit pretty fast and pretty hard. And the first thing people were reaching out to buy was headsets. And that drove demand through the roof, and we basically stocked out, right? We're running a backlog. So it's clear, people working from home have to talk, and they want to talk on headsets. So that demand is outstripped.

We had a small business in webcams, things that go on the top of monitors. And that's sold out immediately, too. So it's pretty clear that things that are associated or traditionally associated with the desktop are in super high demand right now.

Anecdotally, when Asia came back to work, and maybe that profile is going to be different than Europe, which might be different than the Northern America and different in Southern America. But when they came back, they switched to video.

I'll say another trend that's important to be thinking about. And we've seen this multiple times, and it lasts a fairly long period, maybe 2 years, maybe 2.5 years. When these kind of things hit, whether it was 9/11 or a financial crisis, airlines get decimated. And it's currently decimated right now. People are not wanting to get on airplanes. There will be people in offices. They will need to coordinate with people outside of offices, and people are generally very -- because of this, really used to doing video first as a communication tool.

So we believe specifically some of the new line products we have will be implemented -- are implemented and will be continuing to be implemented in the offices, so that people in offices can communicate out to those who are remote and conferencing is going to be a normal and natural way to do business. That's it.

The trend on desktop phones, I think, is TBD. I think that it will eventually come back around that people will install, they will have hoteling desks made, there will be regular desks made, and they will put telephones on them. That's been a long-standing event because when -- especially if you're hoteling, you forgot your headset, the phone is right there. I think there's a utility to it that's undeniable. And so I think that in the longer term, desktops will do well. I think in the near term, it's the office products that go to the desktop and will go home and to the hoteling spaces. And I think video will be implemented because you need to -- everything is going to be communicated with video as a primary, especially when you're communicating in office to remote workers.

And I think the hybrid remote worker is here to stay. I mean it is going to be here to stay even after a vaccine because it's got a real utility for Enterprise.

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Paul Jonas Silverstein, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [37]

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One last question for me, if I may, on the positive side or I think the undisputably positive side in terms of Enterprise headsets, where it's a rising tide. Correct me if I'm wrong, but I think you all had some supply chain disruption in connection when you all did the combination between Poly and Plantronics, which caused some share loss. And I don't know if you've regained that or if that was a permanent loss.

But more importantly, looking forward, I trust the customer relationship because these are Enterprise, not the consumer side of your headset business, which is de minimis now. But the Enterprise portion, as long as your technical specs are good enough, I trust these customer relationships are very sticky. And it's more the relationship that matters than exactly how you compare to your primary competitors, that these are long relationships and your management of that relationship in terms of delivering products in a timely way, managing the inventory, et cetera, are the dominant factors.

So as we look forward, the question is, is it now pretty settled out where your market share is what it is and you'll ride the tide assuming that demand goes up with work from home, it's really a matter of the degree of demand as opposed to gaining or losing share?

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Charles D. Boynton, Plantronics, Inc. - Executive VP, CFO & Principal Financial Officer [38]

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Well, I think I guess the first part you mentioned, Paul, that it wasn't a supply issue. It was a channel consolidation issue that we mentioned earlier. It was not a supply issue...

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Paul Jonas Silverstein, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [39]

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Yes. My apologies. That's -- my bad, that's what I meant to say.

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Charles D. Boynton, Plantronics, Inc. - Executive VP, CFO & Principal Financial Officer [40]

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No. I just want to make sure it was clear. I don't think we're satisfied with the share loss that we took. I think it was self-inflicted, and we want to get that share back. We've got a great sales force. We've got amazing products. To an extent, some of those are commoditized, but to another extent, they're not. We've got leading technology. We've got great employees, and we want to fight to get that share back.

In this environment, I think all companies are doing well. But the normal market will return. And we want to beat them on sales execution and technology, and it's hard to say how that will play out. But I think we're not satisfied with what had happened last year. So I think...

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Robert C. Hagerty, Plantronics, Inc. - Chairman of the Board & Interim CEO [41]

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One thing that -- sorry, Chuck. I was saying one thing that we mentioned earlier, I don't know if you're on or not. We are adding our headset specialists back. One of the things -- when the channel consolidation came, there was an assumption that anybody can sell -- everybody can sell everything. And there is some specialty around headsets, and we did get rid of that, and we're bringing it back. And so this extraordinary demand situation allows us to go ahead and get that organized, get people trained, get them in the slots. The good news is we had a bunch of people who were also in the company that have been shifted to other roles.

The other thing that, we have some long legacy of selling multiple products. So one of the things that's nice, if you are an Enterprise, we're really the only people that can deliver on headsets, desktop phones, video on the desktop, video in the huddle room and video in the large conference room. So -- and we have strong alliances. I think Zoom and Microsoft and the long tail of others; our ITSP partners like RingCentral and 8x8 and LogMeIn, Vonage, Google Voice and numbers of others, all add to that.

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Operator [42]

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Your next question comes from the line of Amit Daryanani from Evercore.

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Michael Fisher, Evercore ISI Institutional Equities, Research Division - Research Analyst [43]

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This is Michael Fisher on for Amit. I just wanted to dig into the inventory a little bit more. I'm just wondering we're seeing this -- it's about [170] in the quarter. So that's kind of getting towards the levels we saw last year. So I'm just wondering how much of this inventory drawdown we saw was related to supply disruptions where you couldn't build up a normal level of inventory versus sustainably managing inventory lower.

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Charles D. Boynton, Plantronics, Inc. - Executive VP, CFO & Principal Financial Officer [44]

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Yes. That's a good question, Michael. Thank you. The way we think about this is we should be at 6 inventory turns. And historically, we were not. We were at 4. And that we were disappointed. This past quarter, we got to 5, not still our target number. And we got there primarily by selling out of Enterprise headsets.

But please recall back in early Q3, we said that we were going to reduce channel inventory in Q3 and on-hand inventory in Q4. We reduced it more than we had expected, quite frankly, because of the pandemic really accelerated the sales of headsets and, to an extent, had supply constraints. I think inventories could go up a little bit in Q1 as we're rebuilding some of those inventories and as the mix moves.

But our expectation is by the end of this year, by the end of fiscal '21, we'll be at 6 turns, and that would be our target. We may hit 8 again, and that would be a best-in-class. But our -- I think in the short term, we're not going to get exactly to our target 6, but our goal would be to be at that level by the end of the year. So even at [165] where we ended the quarter, it's still above our target working capital model and although a lot -- huge improvement over the prior quarter, not quite to the level that we had expected.

So I think with that, we'll say thank you to everyone for calling in. We appreciate it and look forward to talking with all of you next quarter.

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Operator [45]

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This concludes today's conference call. You may now disconnect.