U.S. Markets open in 52 mins

Edited Transcript of PLT earnings conference call or presentation 5-Nov-19 10:00pm GMT

Q2 2020 Plantronics Inc Earnings Call

SANTA CRUZ Nov 11, 2019 (Thomson StreetEvents) -- Edited Transcript of Plantronics Inc earnings conference call or presentation Tuesday, November 5, 2019 at 10:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Charles D. Boynton

Plantronics, Inc. - Executive VP & CFO

* Joseph B. Burton

Plantronics, Inc. - President, CEO & Director

* Michael R. Iburg

Plantronics, Inc. - VP of IR

================================================================================

Conference Call Participants

================================================================================

* Amit Jawaharlaz Daryanani

Evercore ISI Institutional Equities, Research Division - Senior MD & Fundamental Research Analyst

* David Luke Eller

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* Fahad Najam

Cowen and Company, LLC, Research Division - Associate

* Gregory John Burns

Sidoti & Company, LLC - Senior Equity Research Analyst

* Meta A. Marshall

Morgan Stanley, Research Division - VP

* Paul Jonas Silverstein

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

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for standing by, and welcome to the Poly Q2 Fiscal Year 2020 Conference Call. (Operator Instructions) Please be advised that today's conference call is being recorded. (Operator Instructions)

I would now like to hand the conference over to your speaker today, Mr. Mike Iburg, Head of Investor Relations. Please go ahead, sir.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, operator.

Welcome to Poly's Financial Results Conference Call for the second quarter of fiscal year 2020. My name is Mike Iburg, Head of Investor Relations. And joining me today are Joe Burton, 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 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 Q2 FY '20 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 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'll now turn the call over to Joe.

--------------------------------------------------------------------------------

Joseph B. Burton, Plantronics, Inc. - President, CEO & Director [3]

--------------------------------------------------------------------------------

Thanks, Mike, and thank you, everyone, for joining us today. Before I begin, I wanted to let everyone know that on November 20, we will host an Investor Day at our offices in New York City. We plan to review our corporate strategy, products and partnerships and provide a financial update. As a result, this call may seem a bit shorter than usual.

For the past couple of years, we've been describing 3 market transitions affecting the unified communications industry: the move from on-premises communication solutions to the cloud; the move to open offices; and the rise of mobile workers. These dynamics are playing out in the market, as we predicted, driving demand for intelligent endpoints that can simplify and improve collaboration. As Poly continues to undergo significant transformation, last quarter, we highlighted several issues that would affect our results for a couple of more quarters. While deeper than predicted, the results today reflect the continued impact of an aging video product line, the Skype to Teams transition, China trade tensions, and a softening gaming market. As we work aggressively to manage through these issues, we are very excited to have announced a series of new products that reaffirm our leadership position across our core markets.

In just the past few months, we have announced the largest portfolio refresh in our company's history. Additionally, we significantly expanded the number of solutions we offer with our strategic partners. This is an exciting time for Poly. This wave of innovative new products showcase the potential of Poly and significantly enhance the value we bring to the market and to our key alliance partners.

As we've noted in the past, we acquired Polycom because we could see these major transitions on the horizon. Today, these dynamics are in motion and are dramatically reshaping the unified communications industry, creating demand for new services and endpoints. To capture the full breadth of this market opportunity, we created Poly, which combines the deep scientific and technical acumen of Polycom with the customer focus and operational excellence of Plantronics. Our recently announced portfolio refresh leverages the combined expertise of these 2 technology leaders to deliver industry leading innovation. While these are still early days for our integrated company, we are already encouraged by the momentum we are building. Our recent announcements provide some of the first tangible proof points of the strategic benefits this acquisition will deliver.

Within the video category, we announced the Studio X line of video solutions. We compiled feedback from large and small customers alike, worked closely with our alliance partners, and will bring these new products to market in record time. These video solutions are designed to be remotely managed and completely self-contained, requiring no PC in the room to function. The Studio X video bars are built to natively attach to cloud platforms, such as Microsoft Teams and Zoom as well as interoperate with any standards-based video solution. As we push to dramatically improve the meeting experience, these solutions incorporate breakthroughs in machine learning and artificial intelligence that make video meetings feel more natural and collaborative, all wrapped in a user interface that is as intuitive and easy to use as a smartphone.

Combined with the Poly Studio and the G7500, we now have a full portfolio of software-driven video endpoints built on an entirely new platform. This allows us to continually enhance functionality through software upgrades. So as technology progresses and requirements evolve, we can continue to tailor the experience to individual and corporate needs. With these new products, our video portfolio now delivers industry-leading experiences from the huddle room to the boardroom and everything in between.

Within the voice category, just yesterday at Microsoft Ignite, we announced our CCX family of desktop phones for Microsoft Teams. When combined with the VVX line released last year, we now offer new or refreshed phones for small and medium-sized businesses as well as large enterprise customers. Additionally, for SMBs, we introduced the Trio 8300 conference phone and the D230 DECT wireless phone, both designed for easy deployment by businesses on their own or working with their service provider of choice. The combination of feature sets and price points, coupled with advanced remote management capabilities means we have the ideal endpoint for every business use case.

Within enterprise headsets, we announced several new additions to our popular Savi wireless family. With the new Savi Office and UC Series, we now offer more wearing styles for mobile in-office professionals and are the first to offer deck headsets with active noise cancellation to help employees focus on the job at hand. We continue to deliver headsets with industry-leading features, including advanced ergonomics, superior audio quality and extended battery life. All while offering the broadest range of headsets with active noise cancellation for the enterprise. We view these new offerings as important opportunities for us to strengthen our strategic relationships. Our solutions are designed to simplify the lives of our end users, showcase our partner's technology and expand the range of opportunities available to them.

Let me walk you through a few of the highlights of how we're delivering for our partners. When we announced the Studio X family at Zoomtopia, we noted they were capable of natively running the Zoom app without the need for a laptop connected to the device. We believe this is a critical element of video deployments of any size where remote management and stand-alone capabilities are critical rather than a pure bring-your-own-device approach. Our Studio X and G7500 were designed with these requirements in mind, allowing our UC partners to succeed in accounts of any size.

At Microsoft Ignite, we announced new versions of the Studio X solutions specifically designed and optimized to run native Microsoft Teams. Similar to how it works with Zoom, the Studio X30 and X50 will be capable of running Teams natively on the device with no need for a PC. This functionality is critical to our partners as it continues to lower the cost for enterprise adoption and IT management of UC deployments.

With our comprehensive lineup of native video, phone and headset devices, we reinforced our position as the premier end-to-end solution provider for Microsoft Teams. As these products ship in volume and become certified over the next few quarters, we expect this to be instrumental in our return to growth in FY '21.

Last week, in conjunction with 8x8 and ScanSource, we announced the launch of CloudFuel, a program designed to accelerate and simplify the process of transitioning from legacy on-premises communication systems to cloud-based solutions.

Before I turn the call over to Chuck, I want to provide some context on what has been a difficult top line environment for us this fiscal year. As we outlined on our August 5 earnings call, and I touched on earlier today, we continue to be impacted by our aging video products, the Microsoft Teams transition and macro issues. As we navigate these dynamics and prepare for the upcoming product transitions, we're taking a number of actions to proactively manage our business. These will include a leadership change in our sales organization and a reduction of channel inventory in the December quarter. The completion of our comprehensive portfolio refresh and prioritizing cost and cash management with a focus on debt reduction. We expect the inventory reduction will have a material short-term impact on our results. However, we are confident the recent product and partnership announcements, combined with the other actions we're taking this quarter will benefit our long-term performance.

With our recently announced industry-leading new products, coupled with yesterday's announcement of a full portfolio of endpoints optimized for Microsoft Teams, we believe we are nearing the end of a difficult period in our history. We expect the balance of fiscal '20 to remain challenging, but revenue and profitability will recover in fiscal '21. Chuck will provide more color on the financials in just a moment, but I want to emphasize that despite the near-term headwinds, I continue to firmly believe that the future and growth potential for Poly is stronger than ever.

In summary, these product and partnership announcements are just the tip of the iceberg in terms of what Poly will bring to market over the coming years. We believe the market transitions we discussed when we created Poly are truer today than ever. The first round of new products is a major step forward and will allow us to capitalize on these market opportunities, while focusing on innovative solutions that are not just compatible, but add value for our partners.

With that, I'll turn the call over to Chuck to discuss our financial results in more detail.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Joe.

As I walk through the financials, I'll be referencing the specific page numbers in the earnings presentation deck, where you can find the details, along with additional information. All the comparisons I reference will be to the same period in the prior year, unless otherwise noted.

As Joe outlined, our revenue performance was consistent with the headwinds we highlighted on last quarter's earnings call. Overall, our non-GAAP net revenue of $470 million was down 10% year-over-year. Slide 23 shows the breakdown by product and geography.

Consumer headset revenues were down 26%, as each of our consumer categories declined in the quarter. The strategic review of our consumer business continues to make progress. Similar to last quarter, if we are able to consummate a transaction, we expect it would close at the end of our calendar year. Within our enterprise business, legacy headsets, voice and services declined, while video endpoints and UC headsets grew. On a sequential basis, video rebounded sharply, while enterprise headsets were lower, driven by declines in legacy products. We have seen a pronounced decline in the products that are being replaced and upgraded while new products like Studio and UC headsets are seeing nice growth. The top line FX impact was approximately $4 million negative, which was offset by a benefit to operating expenses of approximately $3 million for a negative EBITDA impact of $1 million.

Turning to Slide 24. Gross margins were down 80 basis points to 52.4% as geographic mix and pricing programs impacted our margin profile. We do expect margins to improve over time with the new product portfolio, consistent with the long-term financial model. Operating expenses were down $15 million, primarily due to cost synergies, lower variable compensation and favorable FX rates.

Going forward, we will continue to manage expenses in line with the business, but expect run rate operating expenses to be above the results we saw this quarter. Operating margins declined 120 basis points in the quarter to 17.3% or $81 million. This was below our operating target of 21% to 24%.

Moving to Slide 25. Adjusted EBITDA was $93 million in the quarter, bringing our trailing 12 months adjusted EBITDA to $399 million. Non-GAAP diluted earnings per share was $1.24.

Moving to Slide 26. We repaid $25 million of debt and ended the quarter with $201 million in cash and investments. This is roughly right on our corporate target of $300 million of liquidity, which includes our $100 million undrawn revolver. Cash flow from operations was $25 million in the quarter, improving sequentially as outflows from integration, restructuring, have begun to step down. As Joe touched on earlier, we are taking actions across the business in order to navigate the current macro environment and prepare for the significant product transitions ahead. After careful consideration, we believe it's prudent to reduce channel inventory at this time. As a result, we expect to reduce channel inventory in the December quarter by approximately $65 million. This action will have a material impact on our third quarter and full year results and is incorporated into the guidance we are providing today.

Given the impact on our guidance, we do not expect to reach a net leverage ratio of 3x EBITDA by the end of the fiscal year. We now believe we will achieve this target in fiscal '21, which we will cover in more detail at our Investor Day in a couple of weeks. Once our channel stabilization is complete, we expect margins and cash generation to improve while integration and restructuring payments continue to taper off and working capital stabilizes and becomes a source of cash.

Turning to guidance. For fiscal Q3, including a channel inventory reduction of approximately $65 million, we expect GAAP net revenue of $383 million to $423 million. We expect non-GAAP revenue of $390 million to $430 million. Adjusted EBITDA is expected to be in the range of $33 million to $53 million. Non-GAAP EPS is expected to be in the range of $0.01 to $0.31.

Looking at fiscal year 2020. We expect GAAP net revenue of $1.72 billion to $1.81 billion, non-GAAP revenue of $1.76 billion to $1.84 billion, adjusted EBITDA of $283 million to $323 million, non-GAAP EPS of $2.94 to $3.74. Our second half outlook does not contemplate the consumer divestiture or other associated cost reductions.

Finally, we want to say that we are committed to the long-term financial model. While the short-term has been more difficult than expected, with the new products and continued cost reductions, we are confident that we can drive sustainable profitable growth.

With that, I'll turn the call back to the operator to open it up for Q&A. Operator?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Your first question comes from the line of Amit Daryanani from Evercore.

--------------------------------------------------------------------------------

Amit Jawaharlaz Daryanani, Evercore ISI Institutional Equities, Research Division - Senior MD & Fundamental Research Analyst [2]

--------------------------------------------------------------------------------

I guess, two for me, if I may. First off, Chuck, if I go through the math on the full year guide, I think you guys are reducing the top line by about $170 million at the midpoint, but the EBITDA reduction at the midpoint is about $130 million or so versus your prior guide. Could you maybe just walk us through why the detrimental margin and EBITDA are so severe? And importantly, how they recover as you go forward beyond fiscal '20?

--------------------------------------------------------------------------------

Charles D. Boynton, Plantronics, Inc. - Executive VP & CFO [3]

--------------------------------------------------------------------------------

Certainly, Amit. Thank you. Effectively, what we're seeing is continued weakness that we had experienced both in Q1 and this past quarter, specifically with the legacy products. So we did see some strong growth in UC and in Studio. But the legacy products that are being updated, desk phones, the videoconferencing equipment. Specifically, we're experiencing softness. And we think that, that will materially improve in the future, not directly in Q3 and Q4 but into fiscal '21, with the release of all the new products that are coming out. We've released a few of them already, and we have a whole slew of releases coming out here in the near future.

--------------------------------------------------------------------------------

Amit Jawaharlaz Daryanani, Evercore ISI Institutional Equities, Research Division - Senior MD & Fundamental Research Analyst [4]

--------------------------------------------------------------------------------

Got it. And I guess, if I could just follow-up, maybe, Joe, you could talk a little bit about what exactly are you doing with the channel inventory right now? Is it essentially things that have to be discounted to be sold? Are they getting written off? And then, either -- I guess the question may just be, what's the conviction that $65 million channel reduction is the right number versus perhaps it's getting more severe? And how confident -- or what gives you confidence that this should be the last set of inventory reduction you need to do with the channel?

--------------------------------------------------------------------------------

Joseph B. Burton, Plantronics, Inc. - President, CEO & Director [5]

--------------------------------------------------------------------------------

Yes, let me start on that, Amit, this is Joe. So a couple of things. So first of all, as we kind of work through that, these are products that we feel are still good products in the channel, we're not going to do excessive discounting to flush these out, they need to flow through in a normal kind of way. These products are selling just fine, albeit a little slower than we thought. Unfortunately, we thought the sell-out was going to be a little stronger. We built a bit more channel inventory than we would like. But really, as we look forward over the next couple of quarters, taking this $65 million out, which if you do the math, is broadly a couple of weeks of inventory out of the channel. We feel like it's going to put us at the right amount of inventory in the channel going forward. Other reason we can actually shorten this up is, as we've actually pulled a lot of our manufacturing together in Mexico. Frankly, we can shorten that supply line a little bit, hold less in the channel and be able to be more responsive to our customers as demand does spike up over time. So we think this is the right number.

--------------------------------------------------------------------------------

Operator [6]

--------------------------------------------------------------------------------

The next question is from Paul Silverstein from Cowen.

--------------------------------------------------------------------------------

Paul Jonas Silverstein, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [7]

--------------------------------------------------------------------------------

First off, I recognize you didn't give guidance for the third quarter previously. But if I looked at where I and The Street were relative to what you're guiding for now, it looks like it's about $100 million shortfall. And I don't know if you could answer the question this way, but I'll ask the question, which is of that $100 million, can you apportion where the shortfall -- what drives the total $100 million number, the piece parts of that? And then I've got a couple of follow-ups.

--------------------------------------------------------------------------------

Charles D. Boynton, Plantronics, Inc. - Executive VP & CFO [8]

--------------------------------------------------------------------------------

Sure, Paul. Thank you. So in Q3, $65 million is effectively channel inventory and that is somewhat across the board. And in terms of the remaining amount that we're -- that we've lowered, it is more concentrated in desk phones. And then secondarily, into headsets and audio conferencing. And I would say the desk phones is directly related to the Skype Teams transition and audio conferencing and video is primarily the launch of the whole new suite of video products that we will go into production and start to ship at volume in Q4.

--------------------------------------------------------------------------------

Paul Jonas Silverstein, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [9]

--------------------------------------------------------------------------------

All right. I appreciate that. And if you already responded on this, my apologies. But looking at the video -- the new video platforms, the whole room platforms, in particular, can you just remind me, remind us how many platforms you now have into the marketplace, how many more there are to go? And Joe and Chuck, I trust your commentary, it sounds like -- and I guess, here's the question. The weakness that you referenced in terms of the uptake being okay or good, but just not quite as much as you had expected or hoped, does that also apply to these new video conferencing platforms? These smaller, less expensive platforms where one would expect the unit uptake to be pretty prominent. And what do you see going on there? How much of this -- and there's a larger question here, I apologize, but how much of the weakness is company-specific? How much of this is macro and demand related?

--------------------------------------------------------------------------------

Joseph B. Burton, Plantronics, Inc. - President, CEO & Director [10]

--------------------------------------------------------------------------------

Yes, great question, Paul. I'll take as much of that as I possibly can. And if I'm missing a piece, just feel free to ask the follow-up. So once again, we think that broadly speaking, the market is alive and well. We've experienced some weakness for the reasons we talked about. We're getting impacted by an aging video product line, Skype to Teams transition, I guess China trade tensions are a bit macro, of course, and then the softening gaming headset market.

But let's zero on in the first two, aging video product line and Skype to Teams transition, which are somewhat interrelated. So first of all, the -- of our new video lineup, which we've now announced all of, but to be really clear, the product that's been in the market for several quarters is our Studio -- our Poly Studio product, which is a USB product, it's been out there since February or so and is ramping nicely, although we've always said it won't be material to revenues before our fiscal Q4 at the earliest. So still satisfied with its ramp in the market. The next 2 products that we announced at Zoomtopia with native Zoom support on the product and then we announced the Microsoft variant this week at Microsoft Ignite are our Studio X30 and Studio X50 products. So these are video bars that run the Zoom app, run the Teams app natively on the product and also interoperate with any standards-based video system out there. So a standard SIP or 323. Those have been announced over the last couple of weeks, fantastic early write-ups on them by the video industry analysts, but those products actually start shipping in mid-December to January, depending upon the product. So clearly, no material effect on revenues, really probably until our fiscal Q1. So those products are a bit out. The last video product that matters is our G7500 product we've been talking about for a couple of quarters. Once again, shares the same hardware platform inside, shares the same software. So it also will get the native Zoom, native Teams and the standards-based interoperability. The great news is we're through building our entire video line that we need to refresh our video products. We've announced them all, and we're shipping them either already or over the next month or so, but it will take a little while for those to transition through. We think between the new video products as they get in market, the new Teams native CCX phones and then a couple of little headset releases that are going on as well, we think we're back to having a fully winning product portfolio that is announced, built and starts filling into the channel, which should address our weakness a couple of quarters out. Between now and then, we have to live with the aging video products and the new ones trickling in a little bit. Is that helpful?

--------------------------------------------------------------------------------

Paul Jonas Silverstein, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [11]

--------------------------------------------------------------------------------

It is. But guys, correct me if I'm wrong, I think you have offered some commentary in terms of quantifying where you were at with respect to revenue from the new video platforms in both the initial quarter launch and then last quarter. Can you give us an update as to where that revenue was at this quarter?

--------------------------------------------------------------------------------

Charles D. Boynton, Plantronics, Inc. - Executive VP & CFO [12]

--------------------------------------------------------------------------------

Sure. So we don't disclose the specific number, but the great indicator is our sales out quarter-over-quarter have almost doubled. So we feel really good about how it's selling through the channel, which is the really, really important indicator and a great leading indicator for the next products that are shipping in December.

--------------------------------------------------------------------------------

Paul Jonas Silverstein, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [13]

--------------------------------------------------------------------------------

So Chuck, in the second quarter -- in the preceding quarter, if I remember correctly, it doubled relative to the initial quarter launch and then it's doubled yet again this past quarter. Is that the comment?

--------------------------------------------------------------------------------

Charles D. Boynton, Plantronics, Inc. - Executive VP & CFO [14]

--------------------------------------------------------------------------------

Well, last quarter, we talked about revenue doubling. So this quarter, we didn't talk about sales out because it was still a brand-new product last quarter. So it would have way more than doubled the prior quarters because it was a very small number in the sale out. Now we're seeing actually the products in markets selling through the channel and gaining some real nice share in accounts like CDW and others.

--------------------------------------------------------------------------------

Operator [15]

--------------------------------------------------------------------------------

The next question is from Meta Marshall from Morgan Stanley.

--------------------------------------------------------------------------------

Meta A. Marshall, Morgan Stanley, Research Division - VP [16]

--------------------------------------------------------------------------------

Great. Maybe first question for me is just on the Head of Sales transition. Has somebody new been put into that spot? And just -- are they from within the company, outside the company? Maybe starting there. And then second question, maybe just piggybacking on Paul's question of if we take kind of the $100 million top line impact from this quarter and say $65 million of it was channel inventory and $35 million is from other products, that would imply kind of $80 million, $90 million guide down for Q4, where there isn't kind of an accompanying like inventory corrections. So I guess, I'm just wondering like why it gets worse in Q4, particularly as you have a lot of new products out, where you've made a lot of announcements, maybe prior to them coming out. So like, I would have expected that there would have been kind of some pent-up demand for them and that you wouldn't have had to wait so long for there to be revenue on some of those products. Those are my 2.

--------------------------------------------------------------------------------

Joseph B. Burton, Plantronics, Inc. - President, CEO & Director [17]

--------------------------------------------------------------------------------

Yes. Hi, Meta, this is Joe. I'll take the sales question, which is relatively easy and then let Chuck lead off on the numbers here in a minute. So first of all, to be real clear, yes, the Head of Sales is -- has departed the company. We have not identified a permanent Head of Sales yet. We have several strong candidates in the pipeline. We're working with an external firm, and we think we'll make a hire there over the next few weeks when the time is appropriate. In the meantime, I'm personally driving sales. So the 3 theater lead sales operations and a couple of other folks are reporting to me. While I don't intend to run sales permanently, I want to get a great salesperson in at the right time. This is the third time in my career that I've had sales reporting to me for multiple quarters on end, driving that. So certainly a move I'm very comfortable with in the short run and look forward to working with all of them to really drive our sales out correctly during these product transitions. Hopefully, that helps.

And I'll let Chuck answer the numbers question and then you can always come back if there's more on sales. Go ahead, Chuck.

--------------------------------------------------------------------------------

Charles D. Boynton, Plantronics, Inc. - Executive VP & CFO [18]

--------------------------------------------------------------------------------

Great. Thank you, Meta. So a year ago, Q4, we did $488 million in revenue. And if you just run the math, the midpoint of the guide for Q4 would be $455 million. So it's about a $30 million reduction year-over-year. A portion of that is consumer. And again, we are in a strategic review process, we've included consumer so far in our forecast, but understand that the consumer drop is relatively material in that reduction. The great news is that in Q4 the new -- some of the new video products are coming to market. The bad news is we don't have a huge amount of supply allocation in Q4, a lot of the higher volumes start ramping in Q1. But we will be having the new Studio X30 and X50 selling into the channel in Q4 and recognizing some revenue, but not as much as we'd like, given the supply constraint. So the actual -- I'm not sure of your exact model, but as we look at kind of year-over-year, it is down $30 million, a big portion of that, though, is consumer. And then as we get the new desk phones and team certifications, we expect that those revenues will recover.

--------------------------------------------------------------------------------

Operator [19]

--------------------------------------------------------------------------------

Next question is from Greg Burns from Sidoti & Company.

--------------------------------------------------------------------------------

Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [20]

--------------------------------------------------------------------------------

Yes, just a question on the cash flow. The working capital continues to build. The cash flow is a little weaker as a result this quarter than we were expecting. How should we be looking at that? When do we see the working capital build turn around and start to become a source of cash for you?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Greg, I think I heard most of what you were saying, it was a little faint. But if I can piece it together, the question was around the working capital build, how do we think about the statement of cash flows. So we had a pretty strong cash quarter, a little better than our outlook. We generated $25 million of cash flow from operations. Free cash flow was $22 million. We were able to use that cash to then pay down our long-term debt by $25 million. We did that even while working capital increased approximately $30 million. That increase, quite frankly, is because our sell-through was a little lower than we had expected. And so our inventory went up a little bit. AR, I believe, went up a little bit as well. Both of those we expect will improve significantly in the long term. So we think that working capital will be a source of free cash flow materially. Inventory probably will not improve much in Q3 because of the channel inventory reduction plan, but we do expect our on-hand inventory to significantly reduce in Q4 once this -- the channel has stabilized. We do expect AR to improve materially in Q3 from a cash generation standpoint. But again, it is our biggest revenue quarter. So the total AR balance will go up, but we believe that the overall turns metric should improve. Hopefully, that answers your question, Greg, if not, maybe you can repeat it because it was a little faint.

--------------------------------------------------------------------------------

Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [22]

--------------------------------------------------------------------------------

Yes. No, that got it. And I guess you focused a lot here on the aging video product portfolio. You did mention China a little bit, and that did come up last quarter. Could you just maybe update us on what's going on with China? If that got any worse in the quarter here? And is that part of the reason for the...

--------------------------------------------------------------------------------

Charles D. Boynton, Plantronics, Inc. - Executive VP & CFO [23]

--------------------------------------------------------------------------------

I would say a couple of things. One is China has been difficult. We've highlighted macro trade tensions, et cetera. We have a reasonable services business with okay margins in China. Product sales have been modest. We did launch a 4 product made in China for China product last quarter called the G200, we didn't announce that here because it's a China only product that did sell out the limited quantities that we have. So the leading indicators were somewhat positive, but China has really been a very difficult market for us, and we don't expect that to turn around in the near term.

--------------------------------------------------------------------------------

Gregory John Burns, Sidoti & Company, LLC - Senior Equity Research Analyst [24]

--------------------------------------------------------------------------------

Okay. And I guess last quarter, you put a number on the revenue in China. Do you care to kind of update us on that?

--------------------------------------------------------------------------------

Charles D. Boynton, Plantronics, Inc. - Executive VP & CFO [25]

--------------------------------------------------------------------------------

It's roughly in line with last quarter.

--------------------------------------------------------------------------------

Operator [26]

--------------------------------------------------------------------------------

The next question is from David Eller from Wells Fargo.

--------------------------------------------------------------------------------

David Luke Eller, Wells Fargo Securities, LLC, Research Division - Associate Analyst [27]

--------------------------------------------------------------------------------

Chuck, you've been in the seat for a couple of months. And I wondered if you could talk about just your view on visibility into the business. I think when the Polycom transition or the transaction was announced, the expectation was you'd get some additional visibility into a couple of quarters or years. But if you could just talk about that. And then also, you called out the transitional factors, but also kind of some self-inflicted wounds from projections. Any other self-inflicted wounds to call out in the quarter?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So I would say visibility, we've been struggling a bit. It's obvious, the last quarter and this quarter have been 2 difficult quarters. We built channel inventory, and we are now taking it down. Our inventories have gone up. We want those to go down. So I would say the integration has been a little more challenging than we expected. We did highlight sales integration challenges last quarter. We did make a leadership change in the sales organization. So we do expect to improve visibility, but it has been, I'd say, improving, but not great. Joe and I are very, very focused on improving our ability to forecast the business. What I would say is we're proud of the team and the work they've done launching these great new products. And the early indicators are quite strong with all of our go-to-market partners. And so we expect that visibility will improve, we still think that we have a tough -- a couple of tough quarters ahead of us, but we're bullish certainly on 2021, and we look forward to talking about '21 at our Analyst Day, November 20.

--------------------------------------------------------------------------------

David Luke Eller, Wells Fargo Securities, LLC, Research Division - Associate Analyst [29]

--------------------------------------------------------------------------------

Okay. And then any thoughts on self-inflicted wounds in the quarter that were outside of the team's transition and China and the aging product line?

--------------------------------------------------------------------------------

Joseph B. Burton, Plantronics, Inc. - President, CEO & Director [30]

--------------------------------------------------------------------------------

I think those are broadly at -- I think when we talked a quarter or so ago, we talked about there being significant integration issues at that time and that there might be some overhang this quarter. Maybe a little overhang, but not materially. I think we're -- sell out has been a little bit weaker than we thought, primarily due to the aging products and the -- frankly, the Teams transition going even faster and more powerful than we thought. Interestingly, that goes from being a detriment when we have old products, and it really becomes a positive as soon as the new products are in market. Unfortunately, we're on the wrong side of that chasm for another quarter or so here. But no, other than just some normal integration stuff, no huge things. I guess the only other one I might note a little bit was some discounting related to some of the aging products that we thought would stimulate demand and frankly, maybe did not stimulate quite as much as we would like. So we may have given a little money away we shouldn't have, and that's always painful. But no, nothing material.

--------------------------------------------------------------------------------

David Luke Eller, Wells Fargo Securities, LLC, Research Division - Associate Analyst [31]

--------------------------------------------------------------------------------

Okay. And then could you go back to the earlier question on the revenue, the reduction in revenue guidance, some $160 million, $170 million and then EBITDA guidance coming down $135 million? Could you just put a finer point on that again of why the decremental margins are so harsh?

--------------------------------------------------------------------------------

Charles D. Boynton, Plantronics, Inc. - Executive VP & CFO [32]

--------------------------------------------------------------------------------

Certainly, from a margin standpoint, there's a couple of things that are happening. One is, when you have less products being manufactured, there's overhead being absorbed into fewer products. So that is one factor. The second is the discounting that Joe mentioned, given the age of the products. And so there are some other items in there as well. But effectively, most of the margin -- EBITDA reduction is tied to lower volumes that would be to clear out channel inventory as well as adjusting to the reality of the aged products.

--------------------------------------------------------------------------------

David Luke Eller, Wells Fargo Securities, LLC, Research Division - Associate Analyst [33]

--------------------------------------------------------------------------------

Okay. And then could you talk about -- in the slide deck, you -- the slide that has the long-term growth rates for each one of your segments, there's no change this quarter versus last quarter. But could you just give us an outlook on -- or an update on any changes in those end markets? And then also, could you put a finer point on the outlook by business line for this year? And like what's implied in the FY '20 guidance on revenue?

--------------------------------------------------------------------------------

Charles D. Boynton, Plantronics, Inc. - Executive VP & CFO [34]

--------------------------------------------------------------------------------

A little bit. This slide, we intend to talk about significantly at Analyst Day. So while Joe may want to add some color here, but we do plan on going in detail into each of the categories and then also talking about fiscal '21. So that is a key part of our topic in 2 weeks.

--------------------------------------------------------------------------------

Joseph B. Burton, Plantronics, Inc. - President, CEO & Director [35]

--------------------------------------------------------------------------------

Yes. Only thing I would add, looking at this slide and, obviously, as Chuck said, we'll add more color in a couple of weeks. These are still essentially the industry growth rates. I mean a couple of them may have shifted up a point or down a point, but those are the growth rates. Once again, as we refresh our product line fully, which we've announced all of, when we get all those in market over the next couple or 3 quarters -- the next couple of quarters, our ability to compete for these growth rates, we think, is reasonable. Now the exact color on which ones we think will do a little worse, which ones we think will do a little better based on geography and whatnot, more to come at the Analyst Day. But we do see ourselves in a position to compete for these kind of growth rates very comfortably with the new products overall.

--------------------------------------------------------------------------------

David Luke Eller, Wells Fargo Securities, LLC, Research Division - Associate Analyst [36]

--------------------------------------------------------------------------------

And then outlook by business line that's embedded in the '20 guidance?

--------------------------------------------------------------------------------

Charles D. Boynton, Plantronics, Inc. - Executive VP & CFO [37]

--------------------------------------------------------------------------------

So we'll certainly cover that in detail, both '20 and '21. I mentioned earlier, we see UC headsets having strong growth, Studio having strong growth and then desk phones being the most challenged in the short term, along -- and then secondarily, audio and video conferencing.

--------------------------------------------------------------------------------

Operator [38]

--------------------------------------------------------------------------------

The next question is from Mike Latimore from Northland Capital Markets.

--------------------------------------------------------------------------------

Unidentified Analyst, [39]

--------------------------------------------------------------------------------

This is [Vijay Dewar] for Mike Latimore. What additional products do you plan to release for the rest of this fiscal year?

--------------------------------------------------------------------------------

Joseph B. Burton, Plantronics, Inc. - President, CEO & Director [40]

--------------------------------------------------------------------------------

Sorry, I didn't fully understand, Vijay. What about products?

--------------------------------------------------------------------------------

Charles D. Boynton, Plantronics, Inc. - Executive VP & CFO [41]

--------------------------------------------------------------------------------

The products we're going to release the rest of this fiscal year.

--------------------------------------------------------------------------------

Joseph B. Burton, Plantronics, Inc. - President, CEO & Director [42]

--------------------------------------------------------------------------------

Oh, which are they? So a couple of things. Once again, as we -- thanks, Vijay. I understand now. So one of the things I -- even with a tough top line environment so far this year for us, I am really excited that by the end of this calendar year, we will have refreshed every major product at Poly. Every major Plantronics product, every major Polycom product refreshed and on target for the industry.

A quick recap, over the last year or so, we have obviously refreshed many, many of our headsets. We've put out our new VVX50 line of phones. We've put out the Studio USB product we were talking about earlier that's ramping very nicely. And we put out the G7500, our modular flagship video product. So all of those, we've already executed on over the first year or so of the merger. Over the next few months we've announced and will be putting out our Studio X video bars that natively run Zoom, Microsoft Teams and interoperate with standards-based video systems. And these are fantastic products. I expect these to really be industry leaders in every way. And if you go out and look at what's been written about them so far, I think the market agrees. Other new products still to come out are the CCX phones, which are our premium phone line designed especially for Microsoft Teams, fabulous phones. I got one on my desk, and it's a good one. And several new headsets that we've announced that are also either updated general market headsets or specific ones dedicated for Microsoft Teams. Any way you want to look at it, every single product we have, we think, is refreshed and at or above market, in most cases, above. And a little bit of a plug for the Analyst Day we talked about, the vast majority of these products will be available at the Analyst Day for you to see demos and even touch and feel for yourself.

--------------------------------------------------------------------------------

Unidentified Analyst, [43]

--------------------------------------------------------------------------------

Yes, that's fair. Could you just comment on the demand from the Microsoft, Cisco and Avaya environments? And we should -- I mean how do you look at Teams, whether or not it's a tailwind in December quarter or in a subsequent quarter? So how -- when will it now be a tailwind? Or is it -- will that be a challenge for the next couple of quarters?

--------------------------------------------------------------------------------

Joseph B. Burton, Plantronics, Inc. - President, CEO & Director [44]

--------------------------------------------------------------------------------

Yes, you bet. Let me take Avaya and Cisco first and then go to Teams since it's a longer answer. Avaya and Cisco are great partners in the industry for the most part. We still sell a fair number of headsets with both Avaya and Cisco, in particular, into the contact center, but also with their unified communications products. No real change there. Even though they both have a few headsets, we continue to be interoperable with them. I know just a couple of weeks ago, some of our latest products went up on the Cisco website as fully integrated and tested and compatible. So those partnerships remain alive and well.

On the Microsoft Teams' side, we participate across all 4 of our major enterprise product lines, enterprise headsets that are compatible with Teams, desk phones that are compatible with Teams, conferencing phones that are compatible with Teams and video that's compatible with Teams. To be clear, our headset business has done very well during the Skype to Teams transition. Those products stayed compatible the whole way. We were out in front on our development road map and our testing, all good. So we do wonderful with Microsoft Teams with our headset business.

It's the phones and the video products that we fell just a little bit behind on our time frame. And frankly, it was an interesting bet, and I was a big part of it. We decided not to be first to market, we decided to be best to market. There were ways we could have got out there with early Teams products, but it would have set back getting out the solutions we really wanted to have, that we thought our customers demanded and deserved. Those products are all announced and coming out. Q3 will continue to be a tough quarter with Teams on phones and video. Q4 will be a mixed quarter because those products will be beginning to ship in volume. And we really think we're out in Q1 -- in Q1, Q2 before we get the full effect of having the best portfolio.

Oh, I see on the headset side, we actually have 12 Teams certified headsets out there on the Microsoft website right now. I hope that helps.

--------------------------------------------------------------------------------

Michael R. Iburg, Plantronics, Inc. - VP of IR [45]

--------------------------------------------------------------------------------

Yes, I think we'll take one more question.

--------------------------------------------------------------------------------

Operator [46]

--------------------------------------------------------------------------------

The next question is from Fahad Najam from Cowen.

--------------------------------------------------------------------------------

Fahad Najam, Cowen and Company, LLC, Research Division - Associate [47]

--------------------------------------------------------------------------------

I kind of want to visit the competitive dynamics that you're seeing and if you can comment on one. Zoom recently invested in Neat, and Cisco and Microsoft are collaborating on Teams. So it seems like 2 very interesting developments from a competitive landscape that could potentially present competitive headwinds to you guys. I'm wondering to what extent you're beginning to factor some of that in your outlook, and how we should be thinking about these new shifting collaboration partnerships in the marketplace affecting you guys.

--------------------------------------------------------------------------------

Joseph B. Burton, Plantronics, Inc. - President, CEO & Director [48]

--------------------------------------------------------------------------------

Yes. Great question. Happy to go into it. So when we put Poly together, and we talked about these 3 market transitions of on-premises communications moving to the cloud, the move to the open office and the rise of mobile workers, literally taking the $40 billion a year communications industry and turning it on end, we did not think we were going to be the only company to notice and want to compete in that. So we're not surprised these things are happening. Frankly, we predicted a company like Neat occurring based on what was going on out there. Clearly, I know the leadership of that company. I know some of the engineers, they built a decent single product. Frankly, we intend to out-execute them and get the lion's share of the business with Zoom, period, the end.

To the Cisco and Microsoft announcement, if anything, once again, we see this as a -- we see this as kind of proof of our idea that people are going to use different systems. We say the reason Poly's going to win is because at one point in the day, you'll be on Teams. Later, you'll be collaborating with somebody on Zoom. And yet later in the day, you're likely to be on Cisco or GoToMeeting or who knows what. We're building endpoints for that market. What was actually announced between Cisco and Microsoft was cloud video interoperability, or CVI. It's an industry term, Microsoft actually published a blog today saying that what this really says is if you're in a Microsoft call and a Cisco call, you can at least lash those together and see each other. Frankly, it mentions in the same blog that they are now doing this with Cisco, that they've been doing it with Poly for years. And that they do it with BlueJeans and Pexip as well, that's who it was. So this is really just basic interoperability in the industry, which we fully support and encourage because if we can get everybody using video on every call, obviously, it just grows the market, and it's great for all of us.

--------------------------------------------------------------------------------

Fahad Najam, Cowen and Company, LLC, Research Division - Associate [49]

--------------------------------------------------------------------------------

If I could push you on the last piece in terms of how -- at least from what I'm looking at it from -- and maybe I'm totally wrong, so you can correct me, is if a Cisco end device or Webex room device can connect to a Teams meeting, prospectively it could extend the life span and the value of a Cisco end device, and enterprise would probably be less reluctant or will be less -- looking to upgrade their devices when they shift to Teams, for example. So wouldn't that be a negative thing for your business?

--------------------------------------------------------------------------------

Joseph B. Burton, Plantronics, Inc. - President, CEO & Director [50]

--------------------------------------------------------------------------------

Microsoft -- so I understand your thesis, and it's not unreasonable. So I think you're thinking about it in a reasonable way. If you go look at everything Microsoft has to say, everything Zoom has to say, ironically, everything Cisco has to say, going forward, it's all about native experiences. Microsoft is pushing that when you move to Teams, you should get a native Teams endpoint, so you can get the full Teams experience rather than getting a basic interoperability. So Microsoft is going to be on those accounts, pushing for a native solution. The only end-to-end provider of native solutions for Microsoft Teams is Poly. Well, there might be the occasional deal that gets delayed a little bit. It's a big, big market out there. I think you're talking about the relative corner case as we break it down and boy, we have, of somebody that is aggressively going to Teams and has fairly new Cisco equipment would be the part of the market that get -- that might get stalled by this, but that is already baked into our growth plans, and we still feel very good about where we're heading, once we get through this transition.

--------------------------------------------------------------------------------

Fahad Najam, Cowen and Company, LLC, Research Division - Associate [51]

--------------------------------------------------------------------------------

I really appreciate your answers. If I can squeeze one last question in, can you tell us or maybe quantify for us how big your video installed base is so we can try to at least model in some revenue over the long-term for this video refresh?

--------------------------------------------------------------------------------

Joseph B. Burton, Plantronics, Inc. - President, CEO & Director [52]

--------------------------------------------------------------------------------

I'll be honest, Fahad. I'm going to punt on that one because I don't have a good number at my fingertips right here.

--------------------------------------------------------------------------------

Michael R. Iburg, Plantronics, Inc. - VP of IR [53]

--------------------------------------------------------------------------------

Okay. Well, thank you all. We look forward to seeing many of you on November 20 in New York at our office for our annual Analyst Day. Thank you. Have a great day. Bye-bye.

--------------------------------------------------------------------------------

Operator [54]

--------------------------------------------------------------------------------

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.